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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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scorp

Customer Question

how do i report sale of business property of scorp and distribute retained earnings and paid in capital from the proceeds of sale. how will capital gain be reported on the sale as deprecition was taken.

eg
asset sold for 100000
depreciation taken 75000
Additional paid in capital 40000
Retained earnings 10000

How will these items be reported on K1
Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

The corp will file a Form 4797 with the 1120S. It will reflect the sale on that form. Your information does not state the original cost of the equipment, but that will determine whether there is a gain or loss and whether all or a part of the gain or loss is oridinary or capital.


The information on the Form 4797 will then flow through the K-1 and retain its character as gain or loss and ordinary or capital when it shows on the K-1.


If you would like to post the cost information, I can make the answer a little more specific.


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Customer: replied 11 years ago.
Reply to Jon Andrews's Post: This reply does not answer my question about distribution of retained earnings and paid in capital from the sale proceed,
Assume original cost to be 100000
Expert:  Jon Andrews replied 11 years ago.

If the original cost is $100,000 and accum depr is $75,000, there will be a $75,000 ordinary gain on the sale from depreciation recapture. This will pass through on the K-1 as ordinary income. Normally, that would increase the retained earnings. From your post I am not sure if that gain is included in your RE calculation or not. If not, it should be added.


That would leave RE at $85,000. If the proceeds are distributed ($100,000), the distribution would come $85,000 from RE and $15,000 from PIC from an accounting standpoint.


The $100,000 is just shown as a distribution on the K-1 and on the 1120S. If that is the total activity for the year, the shareholder(s) would have $75,000 of ordinary income and $100,000 of distributions. The additional $25,000 is generally not taxable income.


If one or more shareholders bought their stock from someone else instead of it being issued by the corp, it is possible that the distribution will be "in excess of basis". If that is the case, it could cause additional income at the shareholder level.


[email protected]


 

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