Abby sold her unincorporated business which consisted of equipment and goodwill. The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000). Abby had no basis in the goodwill. The sales price for the business was $250,000, with $150,000 for the equipment and $100,000 for the goodwill. The buyer agreed to pay $120,000 on June 30, 2012, and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2012 (exclusive of interest) is:

Question

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Abby's total gain is calculated as the sales price minus the adjusted basis. The sales price is $250,000, and the adjusted basis is $80,000 for a total gain of $170,000.

However, only a portion of the gain is recognized in 2012 because part of the sales price is paid in two years. The recognized gain in 2012 is calculated by multiplying the total gain by the percentage of the sales price received in 2012:

$120,000 / $250,000 = 0.48

So, the recognized gain in 2012 is:

$170,000 x 0.48 = $81,600

However, the gain is limited to the amount of cash received in 2012, which is $120,000. Therefore, the recognized gain in 2012 is $118,000 ($120,000 - $2,000 of unallowed gain).

The interest received in 2014 will be reported as interest income on Abby's tax return for that year.

Abby Sold Her Unincorporated Business Which Consisted of Equipment and Goodwill