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Dear Tax Talk,
I’m in the process of selling the LLC that has been operated as a fish farm (land and equipment were bought by the company from the start). The company has not produced any gains in the last three years of ownership and my partner and I (50-50 partnership) have not taken any depreciation or tax claims on it. The investment so far has been $340,000 and we would like to structure the sale so that it is treated as ordinary loss. How can we do this? Should we sell the equipment (greenhouses, boilers, tanks, etc.) and claim a loss as ordinary income? If we abandon the venture by closing the LLC, can we claim ordinary income?
Sounds like you’re a fish out of water when it comes to the tax consequences. It shouldn’t be an issue getting an ordinary loss, as you’ve used the equipment in a business. However, having not claimed depreciation is wrong. Good news is that you may be able to amend the last three years of tax returns to correct the depreciation oversight. It sounds like you should get an accountant, however, to maximize your tax benefits with the fishy business.
Obviously, if you can’t sell at a gain, then the next best thing is to be able to claim an ordinary loss. Ordinary losses can offset other income such as from salaries, investments or other businesses. The opposite of an ordinary loss is a capital loss, which is limited to offsetting capital gain. Ordinary losses offset capital gain as well, so it is far better to have a loss classified as ordinary.
The sale of property used in a trade or business such as a farming operation is considered the sale of a Section 1231 asset. The basis of the property sold needs to be adjusted for depreciation allowed or allowable. Although depreciation may have not been claimed, if it was allowable, as it should be for business use property, then you need to adjust your basis for the amount that would have been allowed. If you amend your prior returns, the amount that should have been allowed will come forward as a carryover so that you’re not losing any tax benefits.
Obviously, you don’t want to abandon anything you can sell for money. It’s better to get a dollar than to claim a loss that will only save you a fraction of a dollar in taxes. Ordinary losses are claimed on Form 4797.
Read more about taxes in our Tax Guide.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.