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 1120-S, 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 1120-S 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.

  • Description of the property.
  • Date the property was acquired and placed in service.
  • Date of the sale or other disposition of the property.
  • The shareholder's pro rata share of the gross sales price or amount realized.
  • The shareholder's pro rata share of the cost or other basis plus the expense of sale (reduced as explained in the instructions for Form 4797, line 21).
  • The shareholder's pro rata share of the depreciation allowed or allowable, determined as described in the instructions for Form 4797, line 22, but excluding the section 179 expense deduction.
  • The shareholder's pro rata share of the section 179 expense deduction (if any) passed through for the property and the corporation's tax year(s) in which the amount was passed through.

    To calculate the amount of depreciation allowed or allowable for Form 4797, line 22, add the amount from the shareholder's pro rata share of the depreciation allowed or allowable to the shareholder's pro rata share for the section 179 expense deduction, reduced by any unused carryover of the deduction for this property. This amount could be different than the amount of section 179 expense the shareholder deducted for the property if their interest in the corporation has changed.

  • If the disposition is due to a casualty or theft, a statement providing the information the shareholder needs to complete Form 4684, Casualties and Theft.
  • If the sale was an installment sale made during the corporation's tax year, a statement providing the information the shareholder needs to complete Form 6252, Installment Sale Income. The corporation separately reports the shareholder's share of all payments received from the property in the following tax years.

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.

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