The sale of business assets is reported on Form 4797, Sale of Business Property. Publication 544, Sales and Other Dispositions of Assets, provides further explanations on how to treat sales of business assets.
There is no one-year grace period to reinvest the proceeds in another business. The only way to avoid tax on the gain would be to enter into a like-kind exchange. Publication 544, Sales and Other Dispositions of Assets contains details on the requirements for a like-kind exchange.
If you sell your fishing boat and fishing license that results in a profit/gain, the gain is taxed. For example, assume the following facts:
- Boat purchased for $50,000
- Depreciation claimed on returns (or allowable depreciation if higher) $34,380
- Remaining basis $15,620 ($50,000 cost minus $34,380 depreciation = $15,620 remaining basis)
Example 1: If you sell the boat for $40,000, you will have a gain of $24,380 ($40,000 selling price minus $15,620 basis = $24,380). This gain is taxed at the ordinary income rates because it is less than the amount of the prior depreciation claimed. The rate of tax that you must pay on this $24,380 will depend upon your other income and the tax bracket at which this income is taxed. The tax rate will not be the 20% long-term capital gains rate. Since depreciation recapture is treated as ordinary income, it is not eligible for the more beneficial capital gain treatment.
Example 2: If you sell the boat for $60,000, you will have a gain of $44,380 ($60,000 selling price minus $15,620 basis = $44,380). In this situation, the amount of the gain representing the prior depreciation claimed, or $34,380, will be taxed at the ordinary income rates as explained in Example 1. The remaining gain, representing the amount received in excess of the original cost of the boat, is taxed at capital gain rates.
Example 3: The same procedures apply to the sale of your license. However, whether any gain on the license is capital or ordinary will depend upon prior amortization deductions you may have claimed on the license. Fishing licenses acquired after August 10, 1993, are eligible for amortization. However, if an election was made, amortization can be claimed on property acquired after July 25, 1991. If the license was acquired before these dates, no amortization was available. If the license was acquired without cost, of course there will be nothing available to amortize. To the extent of prior amortization deductions claimed, the gain will be taxed at ordinary income rates as explained in Example 1. To the extent the sales proceeds from the license exceed your original cost, this excess will be taxed at the capital gains rate as explained in Example 2.