1120-US: Gain or loss on the disposition of section 179 assets not included on the 1120 S Corporation return (FAQ)

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Question

Why isn't the gain or loss on the disposition of section 179 assets included on the 1120 S Corporation return?

Answer

The instructions for Form 4797 provide guidance for the treatment of dispositions by an S Corporation of section 179 property. S Corporations that sell, exchange, or otherwise dispose of property for which a section 179 expense deduction was previously claimed and passed through to the shareholders do not report these transactions on Form 4797, 4684, 6252, or 8824 (whether or not the shareholder was a member of the S Corporation at the time the section 179 deduction was claimed). Instead, all information of the sale, exchange, or other disposition must be separately reported on Schedule K-1.

The instructions for Form 1120S, Page 1, (Net gain (loss) from Form 4797) state, "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 the information in Box 17 of Schedule K-1 using Code K."

The 1120S Schedule K-1, Box 17, Code K instructions for Dispositions of property with section 179 deductions state the corporation reports the shareholder's pro rata share of gain or loss on the sale, exchange, or other disposition of property for which a section 179 expense deduction was passed through to shareholders. If the corporation passed through a section 179 expense deduction for the property, the shareholder must report the gain or loss and any recapture of the section 179 expense deduction for the property on their income tax return. The corporation provides all the following information with respect to a disposition of property for which a section 179 expense deduction was claimed.

Therefore, the S Corporation's Form 4797 does not include the disposition of assets in which a section 179 expense deduction was previously passed through to the shareholder. Instead, these asset dispositions are reported separately to shareholders on Schedule K-1, Box 17, Code K, Dispositions of property with section 179 deductions.

Related topic: 1120-US: Disposition of section 179 assets FAQs

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