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Old 06-12-2011, 10:38 AM
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S Corp - Sell of Sec 179 asset

Hello,

I have a client, he had expensed assets using section 179 in prior years, and now he has sold them but still remaining life on those assets. So, my question is how to calculate the recapture and how to calculate the gain/loss on the assets. Let's say, bought 1/1/2008 for $10, 000.00 5yrs, but the asset was sold on 12/31/2010 for $3,000.00 - please advise
Thanks in advance



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Old 06-12-2011, 10:20 PM
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“I have a client, he had expensed assets using section 179 in prior years, and now he has sold them but still remaining life on those assets. So, my question is how to calculate the recapture and how to calculate the gain/loss on the assets. Let's say, bought 1/1/2008 for $10, 000.00 5yrs, but the asset was sold on 12/31/2010 for $3,000.00 - please advise”----> Depreciation recapture of Sec. 179 expense for passthrough entities, S corp , partnership, LLP or etc is required at both the entity and owner levels when the entity disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Schedule K-1 . If a passthrough entity disposed of Sec. 179 property during the tax year, the amount of the Sec. 179 expense previously passed through to its owners on a Schedule K-1 is treated as depreciation and must be recaptured under Sec. 1245 to the extent of any gain realized on the disposition at the owner level. The tax gain or loss on disposition of Sec. 179 assets will not be reported on page 1 of Form 1120S , will not be reported on Schedule K, and will not be included on the Form 4797, Sales of Business Property, prepared by the passthrough entity. The entity will eliminate net book gain or loss on Sec. 179 assets from taxable income and present it on the entity tax return as a Schedule M-1 adjustment. The information necessary to calculate the tax gain or loss at the owner level will be reported on a Form 1120S, Schedule K-l, in box 17, Other Information, and designated as code K, "dispositions of property with section 179 deductions. Because the S corp, passthrough entity, must maintain fixed asset depreciation schedules for tax purposes, which includes the Sec. 179 expense deduction, it has the information needed to prepare the supporting schedule necessary for codes K and L items. For example, if you buy tangible personal proeproty for business and trade use for $20,000, the purchase price is $20,000. And assume that the depreciation expense including sec 179 expenses election is $10,000, then the depreciable base or book value of the asset in the year you decide to sell it is $10,000;$20,000-$10,000=$10,000. If you sell the asset for $13,000, then your LTCG is $3,000;$13,000-$10,000=$3,000.Also you need to calculate the amount of deprecation you can recapture,$10,000, as said above. So as $10,000>$3,000; the whole $3,000 is ordinary income. There is no sec 1231 gain. Since the total of the depreciation deductions, $10,000, is greater than the gain realized,$3,000, the entire amount of the gain is reported as ordinary income.
Under the sec 1245 depre. Recapture rules, gains on the disposal of depreciable personal tangible property are taxed a ordinary income as said above,to the extent of the LESSER of 1) the gain, $3,000, in this example, or 2) all depreciation takes, $10,000, in this case , $3,000; as $3,000<$10,000.


Last edited by Wnhough : 06-12-2011 at 10:53 PM.


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Old 06-12-2011, 11:10 PM
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Quote:
Originally Posted by Wnhough View Post
“I have a client, he had expensed assets using section 179 in prior years, and now he has sold them but still remaining life on those assets. So, my question is how to calculate the recapture and how to calculate the gain/loss on the assets. Let's say, bought 1/1/2008 for $10, 000.00 5yrs, but the asset was sold on 12/31/2010 for $3,000.00 - please advise”----> Depreciation recapture of Sec. 179 expense for passthrough entities, S corp , partnership, LLP or etc is required at both the entity and owner levels when the entity disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Schedule K-1 . If a passthrough entity disposed of Sec. 179 property during the tax year, the amount of the Sec. 179 expense previously passed through to its owners on a Schedule K-1 is treated as depreciation and must be recaptured under Sec. 1245 to the extent of any gain realized on the disposition at the owner level. The tax gain or loss on disposition of Sec. 179 assets will not be reported on page 1 of Form 1120S , will not be reported on Schedule K, and will not be included on the Form 4797, Sales of Business Property, prepared by the passthrough entity. The entity will eliminate net book gain or loss on Sec. 179 assets from taxable income and present it on the entity tax return as a Schedule M-1 adjustment. The information necessary to calculate the tax gain or loss at the owner level will be reported on a Form 1120S, Schedule K-l, in box 17, Other Information, and designated as code K, "dispositions of property with section 179 deductions. Because the S corp, passthrough entity, must maintain fixed asset depreciation schedules for tax purposes, which includes the Sec. 179 expense deduction, it has the information needed to prepare the supporting schedule necessary for codes K and L items. For example, if you buy tangible personal proeproty for business and trade use for $20,000, the purchase price is $20,000. And assume that the depreciation expense including sec 179 expenses election is $10,000, then the depreciable base or book value of the asset in the year you decide to sell it is $10,000;$20,000-$10,000=$10,000. If you sell the asset for $13,000, then your LTCG is $3,000;$13,000-$10,000=$3,000.Also you need to calculate the amount of deprecation you can recapture,$10,000, as said above. So as $10,000>$3,000; the whole $3,000 is ordinary income. There is no sec 1231 gain. Since the total of the depreciation deductions, $10,000, is greater than the gain realized,$3,000, the entire amount of the gain is reported as ordinary income.
Under the sec 1245 depre. Recapture rules, gains on the disposal of depreciable personal tangible property are taxed a ordinary income as said above,to the extent of the LESSER of 1) the gain, $3,000, in this example, or 2) all depreciation takes, $10,000, in this case , $3,000; as $3,000<$10,000.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>
Thank you for your reply. Can you please use the example, $20K cost - section 179 $20K - sale for $3K - the recapture will be the difference between what It would be at to the point of the sale. So, the accumulated depreciation $6K - recapture will be $14K - I would like to know how to calculate the gain or loss. Thanks in advance



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Old 06-12-2011, 11:22 PM
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“Can you please use the example, $20K cost - section 179 $20K - sale for $3K - the recapture will be the difference between what It would be at to the point of the sale. So, the accumulated depreciation $6K - recapture will be $14K - I would like to know how to calculate the gain or loss.”---> So, $20,000, original cost(purchase price)-$6,000, A/D.=$14,000, book value and selling price is $3,000, then depre recapture is $6,000(under sec 179 election) and you take a loss, $11,000;$14,000-$3,000=($11,000) there’d be no sec 1245 depre recapture; As said previously, Recapture rules, gains on the disposal of depreciable personal tangible property are taxed as ordinary income as said above,to the extent of the LESSER of 1) the gain, or 2) all depreciation taken, $4,000; As gain , LTCG , I guess , is $0 No depre recap.



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Old 06-12-2011, 11:25 PM
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If your book value is $0; $20,000, OC-$20,000, sec 179 election,=$0; then the whole $3000 ‘d be subject to sec 1245 recap rule as ordinary income.



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Old 06-15-2011, 11:58 AM
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Thumbs up S Corp - Sell of Sec 179 asset

Wnhough, thank you very much for the explanation - I think that I understand the issue - one more question - on your example you calculate a LTCG of $3000 and then after the recapture you calculate another $3000 as ordinary income. So, the question is I should report the $3K as LTCG and the $3K as ordinary income - or just the $3K ordinary income? Thanks



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Old 06-15-2011, 12:18 PM
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“I think that I understand the issue - one more question - on your example you calculate a LTCG of $3000 and then after the recapture you calculate another $3000 as ordinary income. So, the question is I should report the $3K as LTCG and the $3K as ordinary income - or just the $3K ordinary income?”---->Just the $3,000 as ordinary income; actually the $3,000 is LTCG but it is treated as ordinary income up to sec 1245 deprec. Recap amount, in the example, it is $20,000; what I mean is that as you said, $20K cost - section 179 $20K - sale for $3K; this means that your book value is $0; $20,000, OC-$20,000, sec 179 expense,=$0; however, as you sell it for $3,000, then $3,000 is actually LTCG, $3,000-$0=$3,000( as you own the tangible personal assets used for your business and trade for more than one year). But your sec 1245 deprec. recapture is $20,000; so LTCG up to $20,000 is treated as ordinary income; your LTCG is $3,000, so the whole $3,000 is recaptured as your ordinary income that is taxed at your income tax bracket, NOT at capital gains tax rate. The whole $3000 ‘d be subject to sec 1245 recap rule as ordinary income, NOT as LTCG.



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