When an S corporation sells or disposes of an asset for which a Section 179 expense deduction was previously taken, the resulting gain or loss isn't reported on the S corporate return. Instead, the information needed to compute any gain or loss and Section 179 recapture is passed through to the shareholder(s) on line 17, Code K of the Schedule K-1.
To report Section 179 recapture on Form 4797 and K-1 gain or loss on Schedule E in the Individual module, you'll need to follow both sets of instructions below.
Follow these steps to enter Section 179 recapture:
- Go to Screen 17, Dispositions.
- Select Carryovers/Misc Info from the left-side navigation menu.
- Scroll down to the Form 4797 section.
- Locate the Recapture 50% or Less Business Use subsection.
- Enter the total amount of recapture in the Section 179 expense deduction field.
- This input flows to Form 4797, line 33.
Follow these steps to enter Section 179 recapture as ordinary income and link it to Schedule K-1:
- Go to Screen 17, Dispositions.
- Under the Dispositions (Schedule D, 4797, etc.) section, enter any applicable fields.
- Scroll down to the Form 4797 section.
- Enter "-1" in the field Depreciation allowed (-1=none, triggers 4797).
- Scroll down to the Corresponding Activity Information - Passive (8582) / At-Risk (6198) / Investment Tax (8960) / Qualified Business Income (QBI) section.
- Select Schedule E (S corporation) from the Form number of related activity (Ctrl+T) dropdown menu.
- Enter the Activity name or number (Ctrl+T).
- Check the Include in at-risk/basis limitations box.
- Under the Passive Disposition subsection, enter a 3 in the 1 = Complete Disposition, 2 = Partial, 3 = Separately stated on K-1 field.
- You should complete this field if the asset being disposed of was used in a passive activity.
- This input reports the Section 179 recapture as ordinary income on page 1 of Form 4797 and page 2 of Schedule E. It also includes the recapture in basis calculations.
