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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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How to report disposition of Sec 179 S-Corp property?

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Throughout six years, S-Corp bought business property (mostly tools), passing sec 179 deductions to shareholders. S-Corp is now dissolved. Assets have been sold. How, and on which forms, to report these dispositions? (I need step-by-step instructions. IRS instructions are driving me nuts!)

You will report the sale of the assets on Form 4797. If you sold individual assets, you will report each sale and gain to the extent of Sec 179 expense and/or depreciation taken will be Sec 1245 gain and subject to tax as ordinary income.

You will find the step by step instructions on this in the link below (see page 4 in the linke)

http://www.irs.gov/pub/irs-pdf/i4797.pdf

Let me know if you have any other questions.

Customer: replied 10 years ago.

Page 12 of Instructions for Form 1120S: "Corporations should not use Form 4797 to report the sale or other disposition of property if a section 179 expense deduction was previously passed through to any of its shareholders for that property. Instead, report it in box 17 of Schedule K-1 using code K." Which I presume would mean that the shareholders, not the corporation, are required to use Form 4797 to report gains/losses. But where, specifically, on that form?

Yes, you will not report on Form 1120S. But detailed information will be provided by the S Corporation to the Stockholder and he will report it on Form 4797 when he files a tax return.

You will report this in Part III or Part I as the case may be. If you provide details on one of the items - maybe I can give you more information.

Customer: replied 10 years ago.

Thank you. Here goes:
FYI: All business property in question falls into the category of machinery & tools used in a finish carpentry business (general 7yr), plus some office equipment (computers, printers, furniture) – all 100% business use and all were expended via the sec 179 deduction at 100% of their cost.

If I understand correctly:
1) S-Corp will provide shareholders with a statement regarding the property dispositions (per 1120S instructions on page 33-34) and the shareholder will use that information to complete Form 4797. Right? Will this “statement” actually be referenced by Code K on line 17 of the schedule K-1 issued to the shareholders?

2) Original cost of property, less sec 179 deduction, equals new basis. If a tool was purchased in 2001 for $200 and we used the 179 deduction of $200 that tax year, the new basis is zero, right? So, if 5 years later, the tool was sold for ten dollars, there is a taxable gain of $10.00, right?

3) Does S-Corp calculate net gain/loss from any/all dispositions and include this figure anywhere on the Form 1120S – such as on schedule K? If so, which line(s)?

4) On Form 4797, Part III, Line 22 – depreciation allowed or allowable. If ONLY sec 179 expense deductions were taken, leave this line blank? Or am I supposed to calculate the amounts of depreciation that would have been allowed were it not for taking the sec 179 expense deductions?

5) Many items which at some time were expended via sec 179 deduction were retired or abandoned by the date of corporate dissolution, resulting in no effectual gain or loss. Are these items to be included on the statement to the shareholder? (I supposed they should have been noted in the tax year the item was actually retired? OOPS! Is this a fixable mistake?)

6) Some items were disposed of AFTER the date of corporate dissolution, yet still in the same, and final, tax year (as the dissolution). Are these items handled any differently?

7) For items held less than one year and sold at a gain, will I be using part II of Form 4797 – listing the net gain from the disposition on line 17?

8) My husband and I were shareholders in common of our S-Corp, which had formerly been a sole proprietorship – finish carpentry contractor, with employees. We incorporated in early 2001, after 25 years of SP. We used a 351 Statement to transfer the “equity” (assets less liabilities at that point) of the SP into S-Corp stock for the purpose of continuity of business. Do we have to go back through all the years of the SP to account for business property that at one time had been expended via the sec 179 deduction? (A CPA handled all the business/tax paperwork back then. He’s no longer available to us now, but I do have all tax returns, the 351 Statement, Stock basis adjustments, Asset lists, etc.)

Take your time to answer - I have 10 days before last date to file 1120S.

If I understand correctly:
1) S-Corp will provide shareholders with a statement regarding the property dispositions (per 1120S instructions on page 33-34) and the shareholder will use that information to complete Form 4797. Right? Will this "statement" actually be referenced by Code K on line 17 of the schedule K-1 issued to the shareholders?

YES, you are right you will reference it on Line 17 with code K and you will also provide them the details on the dispositions as mentioned in the instructions.

2) Original cost of property, less sec 179 deduction, equals new basis. If a tool was purchased in 2001 for $200 and we used the 179 deduction of $200 that tax year, the new basis is zero, right? So, if 5 years later, the tool was sold for ten dollars, there is a taxable gain of $10.00, right?

YES, you are right

3) Does S-Corp calculate net gain/loss from any/all dispositions and include this figure anywhere on the Form 1120S - such as on schedule K? If so, which line(s)?

No, the S Corp will not report the gain/loss from such dispositions. These amounts will show up as M1/M2 adjustments as income/expense recorded in books but not on Sch K.

4) On Form 4797, Part III, Line 22 - depreciation allowed or allowable. If ONLY sec 179 expense deductions were taken, leave this line blank? Or am I supposed to calculate the amounts of depreciation that would have been allowed were it not for taking the sec 179 expense deductions?

You will include Sec 179 expense claimed as part of depreciation allowed or allowable on Line 22.
You are not required to recalculate depreciation.

5) Many items which at some time were expended via sec 179 deduction were retired or abandoned by the date of corporate dissolution, resulting in no effectual gain or loss. Are these items to be included on the statement to the shareholder? (I supposed they should have been noted in the tax year the item was actually retired? OOPS! Is this a fixable mistake?)

If they were retired than really, it does not affect your tax liability unless you got anything on such retirement of assets. However, you are required to report these to the stockholders as discussed above and then need to be reported on their personal tax returns. But as I said it does not affect the tax liability.

6) Some items were disposed of AFTER the date of corporate dissolution, yet still in the same, and final, tax year (as the dissolution). Are these items handled any differently?

If they are sold after the dissolution, than who had the assets? meaning were they distributed to stockholder? If yes, than they will report these on their tax return directly.

Again, if no income was made on such disposition, it does not affect the tax liability and hence you can report it to the stockholders who will incorporate these on their tax return.

7) For items held less than one year and sold at a gain, will I be using part II of Form 4797 - listing the net gain from the disposition on line 17?

Yes, you will use part II of the form 4797 on line 10 and then as per the instructions calculate the amount. Line 17 will give the total gain from such sale/disposition.

8) My husband and I were shareholders in common of our S-Corp, which had formerly been a sole proprietorship - finish carpentry contractor, with employees. We incorporated in early 2001, after 25 years of SP. We used a 351 Statement to transfer the "equity" (assets less liabilities at that point) of the SP into S-Corp stock for the purpose of continuity of business. Do we have to go back through all the years of the SP to account for business property that at one time had been expended via the sec 179 deduction? (A CPA handled all the business/tax paperwork back then. He's no longer available to us now, but I do have all tax returns, the 351 Statement, Stock basis adjustments, Asset lists, etc.)

You do not have to go back since the entity(S Corp) came into existence after that date and assets were recorded. You need to record the disposition based on the assets you have in the Corporation. You do not have to go back to the sole proprietor to determine the Sec 179 deductions.

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