Client several years ago started a small restaurant chain, operating the individual businesses for 18-24 months and then selling each business. Rinse, repeat.
Client is new to me and I want to make sure i'm treating these transactions properly (don't believe they did in prior years).
Equipment has an original cost of $150K, less $20K of depreciation. No other tangible assets being transferred.
Agreement spells out the $300K of proceeds as allocated $140K towards Equipment, $130K as Goodwill and $30K as a Franchise fee.
Seller continues to receive 1% of sales as a franchise fee, and obviously retains the right to sell other franchises.
Add to that this is an installment sale - with $160K down and $140K on installment over 28 months (no interest).
It's my understanding because they receive contingent payments and retain franchise rights, the $30K franchise fee and subsequent fee income would all be ordinary income.
So, my main question is how to allocate the proceeds:
Am I correct that the first $30K of cash received would be for the franchise fee (ordinary income), the next $10K would be 1245 recapture (ordinary), leaving for the installment sale $260K of proceeds against capital assets with a basis of $130K - a 50% gross profit percentage.
Prior to any additional installment payments, we would have $120K of proceeds, and thus in total $60K of LT capital gain and $40K of ordinary income (recapture plus franchise fee)?
Am I missing something? (just once I'd like the answer to be "No. Perfect IDCPA"....braces for impact...)
TIA