An ABC has tax consequences for both the assignor (the business owner) and the estate. Understanding those consequences before making the assignment helps owners make informed decisions and avoid unexpected tax liabilities.
Gain on Asset Sales
When the assignee sells business assets, any gain on the sale is income to the business entity. Depreciated assets sold for more than their book value produce ordinary income. Assets with embedded capital gains produce capital gain income. The business entity — whether a corporation or pass-through — must file tax returns for the year of the assignment and may have tax liability even if the business has no cash left to pay it.
Cancellation of debt income can create phantom income. When creditors receive less than they are owed in the ABC, the discharged amount may constitute cancellation of debt (COD) income. For insolvent entities, COD income is generally excluded from gross income — but the rules are complex and depend on the entity type. Business owners should consult a tax professional before and during the ABC to understand the full tax picture.
The California ABC System gives business owners and creditors the exact tools, templates, and step-by-step guidance to navigate an Assignment for Benefit of Creditors — faster and cheaper than bankruptcy, without a federal court filing. Request your free evaluation here.
California ABC System — Assignment for Benefit of Creditors 
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