Inherited Sole Proprietorship: Tax & Basis Issues

You've inherited a sole proprietorship operating without a separate legal entity. Understanding how step-up basis applies to individual business assets and how to establish your own tax identity are crucial first steps.

No entity means no separation. A sole proprietorship is not a distinct legal entity. The business assets (equipment, inventory, accounts receivable) were the decedent's personal property. Each tangible asset gets its own stepped-up basis under IRC 1014, but intangible assets like goodwill and customer relationships require separate valuation to establish your new basis.

Self-employment tax starts immediately. If you continue operating, you report income on your own Schedule C and owe self-employment tax (Social Security and Medicare) on net earnings. There is no corporate structure to provide salary/distribution planning opportunities.

EIN and accounts. The decedent's EIN dies with them for a sole proprietorship. You need a new EIN, new bank accounts, and potentially new vendor agreements. The transition creates a reporting gap that must be handled on the decedent's final return and your first return.

The pitfall: People inherit the business and keep operating under the old name without establishing their own tax identity. The IRS sees unreported income, and you lose the ability to cleanly document your stepped-up basis.