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Client closed retail biz

Technical topics regarding tax preparation.
#1
Posts:
2
Joined:
13-Jun-2019 3:44pm
Location:
CA
Hello,

This is my first post. So good to find a group like this.

Maybe I've been staring at this problem too long... I'm confused.

My client closed his schedule c retail biz on October 1, 2017 after 6 or 7 years in biz. (I'm preparing his 2017 return)

He was behind on his rent by about $50K. His landlord allowed him to leave behind all the fixtures and equipment he had bought for the business to satisfy his back rent. This also included all the "leasehold improvements" he made before he opened the biz.

Please confirm I am thinking about this correctly, reporting the disposition of the assets as a sale on 4797:

Leasehold improvements:
cost: 100642
acc depr: $33381
adj basis: $67261
purchase price allocation: 80% of $50K rent owed = $40,000
outcome on 4797: loss of $27261

Fixtures and Equipment
cost $24398
accumulated depr: $24107
adj basis: $291
purchase price allocation: 20% of $50K rent owed = $10,000
outcome on 4797: gain of $9709

Also, should the $50k "purchase price" of the assets then be shown as rent paid on Schedule C? Or is that double dipping?

Related question: He was also amortizing $60k in startup costs. Through the date he shut down the biz he had amortized about $20k. Is it correct to treat the remaining $40k of startup cost as ordinary loss on Form 4797?

Thanks so much (in advance) to everyone for your help.

Deb
 

#2
Pitch78  
Posts:
351
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
I will let the CPAs chime in on the reporting details.

On the rent deduction, yes you can take it. This is really no different than selling the equipment and then paying the rent.

What is the actual value of the equipment, if you know?
 

#3
Nilodop  
Posts:
11345
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
If, as you imply, the FMV of the stuff left behind as payment of the rent equals the unpaid rent, then your entries are OK, and yes, if the rent was not previously deductible as accrued, then it's now a deduction. Or is the stuff only worth its basis, in which case you'd write off that amount as rent and show the "sale" on the 4797 at that amount. Net effect should be the same.

Here's the law on the start-up costs:
(2) Dispositions before close of amortization period
In any case in which a trade or business is completely disposed of by the taxpayer before the end of the period to which paragraph (1) applies, any deferred expenses attributable to such trade or business which were not allowed as a deduction by reason of this section may be deducted to the extent allowable under section 165.
. The loss probably goes on Line 10 of the 4797 as an abandonment.
 

#4
Posts:
2
Joined:
13-Jun-2019 3:44pm
Location:
CA
Thanks very much pitch and nilo!

(haha, sounds like Lilo and Stitch)

deb
 


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