Selling software asset - CGT or Income Tax?

Question

I have written a software program that I have licensed to customers to use for the last 6 years or so. Recently, I have been made another offer to purchase this product outright with source, etc and this time the offer is attractive for me. I am worried about whether I would be taxed as capital gains vs. ordinary income. I spoke with someone at the IRS ("complex tax issues dept") who said that it should be claimed on Sched. D. Up until the first of the year, I was a sole proprietor, but incorporated sub chapter s. I personally still own the software and rights to it. I have not sold it to the new corporation. Whether I get taxed as personal income or as capital gains for this plays a major part in my decision. Any help would be appreciated.

Thanks,

Lee

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San Diego CPA · Accepted Answer

I hadn't read this message before posting a reply to your other message. Nothing in my other response changes based on this message, just one additional comment to note re your message above. You do not need to sell the software or rights to it to the corp, assuming you're the sole shareholder, you can simply contribute it to the corp. If you sell the corp (i.e., sell the stock, not the assets), you'll have capital gain treatment on the sale of the stock of the company. Again, this is a very simplistic response based on the facts above. It certainly is not a recommendation of a specific strategy.

Lee · Answer

San Diego CPA enlightened me by writing:The corporation is wholey owned by my wife and myself 50/50. Would that make any difference? Thanks again,--Lee

San Diego CPA · Answer

No. What I was getting at is that you can make a contribution to the corp, if there are unrelatd 3rd party shareholders, you could still do it but it's gets more complicated for a variety of reasons that generally aren't necessary to consider if you and your spouse own 100%.

Selling software asset - CGT or Income Tax?

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