Let’s say you’re considering shutting down your sole proprietorship business or your single-member LLC business that’s been treated as a sole proprietorship for tax purposes.

What are the tax implications of the impending shutdown? Good question.

We are here to answer that question. Let’s get started.

Asset Sale Tax Implications

If you sell your business, you’re treated for federal income tax purposes as though you are selling the assets of the business. That’s because the existence of a sole proprietorship, or a single-member LLC treated as a sole proprietorship, is ignored under the federal income tax rules.

Therefore, you cannot sell a business ownership interest.

The “sale of a business” is an option only if you operated the business as a partnership, as an LLC treated as a partnership for tax purposes, or as a corporation.

Here’s the federal income tax impact of selling the assets of your sole proprietorship or single-member LLC business.

Allocate the Sale Price

You first allocate the total sale price to the specific business assets you are selling.

You find the federal income tax rules for allocating the sale price in Section 1060 of our beloved Internal Revenue Code1 and related IRS regulations. For a pretty good plain-English explanation of the rules, see the instructions to IRS Form 8594 (Asset Acquisition Statement Under Section 1060).2

Calculate Taxable Gains and Losses

You have a taxable gain if the allocated sale price exceeds the tax basis of the asset in question. The tax basis generally equals the original cost of the asset plus the cost of any improvements minus any depreciation or amortization deductions.

You have a taxable loss if the allocated sale price is less than the tax basis of the asset in question.

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