Is this Considered Business Income?

massachusetts:

i have a small business (sole proprietorship) that had been paid for services rendered by awarding software ownership rights (by contract).

the company that licensed the software ownership rights to my small business later paid me a small amount to release those rights (i.e. release all claims of ownership).

the release of the software ownership rights also has an affiliated cost of no future revenues from licensing the software to customers of my small business. (i no longer own it, and therefore can't license it).

the transaction wasn't exactly a sale because my small business was given those software ownership rights for services previously rendered to the principle company.

should i value the services rendered in fair market value to determine if there was an income or loss on the transaction? if i do that, should i include an estimate of lost future business as a cost?

does the compensation that i received to release the software ownership rights count as taxable income on a schedule c?

thank you.

I HAVE A SMALL BUSINESS (SOLE PROPRIETORSHIP) THAT HAD BEEN PAID FOR SERVICES RENDERED BY AWARDING SOFTWARE OWNERSHIP RIGHTS (BY CONTRACT).

Your basis for gain or loss upon the sale or exchange of the software rights is the value of the services rendered in exchange for the rights, as reported for income tax purposes. If you did not report income for the value of the services as you should have, then your basis for the rights is $0.

THE COMPANY THAT LICENSED THE SOFTWARE OWNERSHIP RIGHTS TO MY SMALL BUSINESS LATER PAID ME A SMALL AMOUNT TO RELEASE THOSE RIGHTS (I.E. RELEASE ALL CLAIMS OF OWNERSHIP).

You have a gain or loss on the release of the rights equal to the difference between the amount they paid you for the release and your basis for the rights.

THE RELEASE OF THE SOFTWARE OWNERSHIP RIGHTS ALSO HAS AN AFFILIATED COST OF NO FUTURE REVENUES FROM LICENSING THE SOFTWARE TO CUSTOMERS OF MY SMALL BUSINESS. (I NO LONGER OWN IT, AND THEREFORE CAN'T LICENSE IT).

There is no deduction for loss of future profits. The tax benefit you get is that you don’t have to pay tax on income you don’t get.

THE TRANSACTION WASN'T EXACTLY A SALE BECAUSE MY SMALL BUSINESS WAS GIVEN THOSE SOFTWARE OWNERSHIP RIGHTS FOR SERVICES PREVIOUSLY RENDERED TO THE PRINCIPLE COMPANY.

That does not change the above.

SHOULD I VALUE THE SERVICES RENDERED IN FAIR MARKET VALUE TO DETERMINE IF THERE WAS AN INCOME OR LOSS ON THE TRANSACTION?

Yes, that would be a good way to do it. Another way would be to determine the fair market value of the licenses.

IF I DO THAT, SHOULD I INCLUDE AN ESTIMATE OF LOST FUTURE BUSINESS AS A COST?

No—see above.

DOES THE COMPENSATION THAT I RECEIVED TO RELEASE THE SOFTWARE OWNERSHIP RIGHTS COUNT AS TAXABLE INCOME ON A SCHEDULE C?

It is a gain on the disposition of a business asset.