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Closing S-Corp - Disposing of Fully Depreciated Section 179 Assets to Self

Forum|Forum|5 years ago
December 10, 2020
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Hi, I have a very small S-Corp I'm closing at year end. I've always been the only owner and employee for the last 20 years.

All assets are fully depreciated under section 179. These are on the books at $10,0000. No liabilities.
$8,000 of the $10,000 is for office equipment over 10 years old, about 20 individual items. Best guess at FMV is $1,000.
$2,000 of the $10,000 is for a computer purchased 4 years ago. Best guess at FMV is $300.

I plan to keep the assets personally. I'm wondering how to account for this for the S-Corp and how to arrive at FMV for the assets?

Considering the low materialtiy, it would seem pretty simple to use my best estimates and report Other Income of $1,300 for the S-Corp. But I'm not sure if that would pass for the IRS. What is the correct way to handle this?

Any thoughts would be greatly appreciated. Thanks!

Best answer by Anonymous_

The difference between the Section 179 deduction and the "used up" portion of MACRS depreciation is called a Section 179 recapture and must be reported as income.

See https://ttlc.intuit.com/community/business-expenses/help/what-is-a-section-179-recapture/00/26867

A

Anonymous_Answer

Employee

The difference between the Section 179 deduction and the "used up" portion of MACRS depreciation is called a Section 179 recapture and must be reported as income.

See https://ttlc.intuit.com/community/business-expenses/help/what-is-a-section-179-recapture/00/26867

M

markonAuthor

Thanks tagteam. That helps alot.

It looks like I will need to complete Form 4797 Sales of Business Property. So now I'm wondering which section I would complete:

Part I: Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other
Than Casualty or Theft—Most Property Held More Than 1 Year
Part IV: Recapture Amounts Under Sections 179 and 280F(b)(2) When Business Use Drops to 50% or Less

It seems like part IV would be more appropriate. Technically, business use fell below 50% because it fell to 0. Is that right?

A

Anonymous_

Employee

@markon wrote:
It seems like part IV would be more appropriate. Technically, business use fell below 50% because it fell to 0. Is that right?

Yes, according to the facts you set forth.

Rick19744

Employee

In addition to the discussion on Section 179, there are several other items that you should be aware of.

Technically you should file form 966.
Additionally, distributions of property from an S corporation is deemed to be treated as a sale at FMV. As such, you would reflect all of the assets as being disposed and any gain would be recognized.
You should not reflect any of the liquidating distributions on the tax return; Sch K or K-1.
Liquidating distributions are reflected on form 1099-DIV in box 9 or 10 as applicable.
Also make sure you connect with the Secretary of State office where the business was incorporated. There may be some forms that need to be completed at the state level.

Unfortunately, regardless of the size of a business, there are generally some rules that get tricky.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

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markonAuthor

Thanks Rick. I wasn't aware of the liquidating distribution. I would have reported that in the normal spot on Schedule K-1 line 16. It looks like I have alot of homework to do. That's why I'm getting ahead of it now!

I thought of something. If I transfer all assets and cash to myself and take liquidating distributions on Dec 31, for the balance sheet portion of the 1120-S form, that would leave me with nothing but zeros for except maybe a couple equity items that would wash to zero. Is that how it's normally done? It seems like the IRS might have a problem with that because they wouldn't be able to see that value of the assets before they were transferred.