How to enter S Corp liquidated property in 1120-S using TurboTax Business

[user17733503287]

I’m using TurboTax Business.  I closed my single-person S Corp and liquidated property (some was sec 179 fully depreciated property and some was expensed as de minimis) as a “deemed sale” gain to me, the only shareholder.  How do I enter S Corp liquidated property in 1120-S without the deemed sale gain affecting the 1120-S ordinary business income?  I’ve tried entering in the “disposed property” section of TurboTax and also tried Form 4797 but neither works for reporting liquidated property as far as I can tell.

My understanding is that the S Corp reports the gain on the liquidation sale on a 1099-DIV to the shareholder but I’m assuming the IRS wants to know the original purchase price, purchase date, depreciation (if any), and gain for each liquidated asset as part of the 1120-S filing.  I don’t know how to enter that in TurboTax.

[DaveF1006]

This is a common point of confusion because tax software often treats "dispositions" as routine sales, whereas a corporate liquidation triggers a specific set of rules under IRS Section 336.

You’re correct that the gain shouldn’t show up as ordinary business income. In a liquidation, the S Corp is treated as if it sold its assets to you at fair market value. This gain gets reported on the 1120-S, but it should show up on your K-1 as a Schedule D (capital gain) or Form 4797 (ordinary gain or recapture), not as ordinary business income on Line 1.

Here’s how to handle this in TurboTax Business, and why it works this way.

1. The Reporting Correction: 1099-DIV vs. K-1

1. While a C Corp uses Form 1099-DIV for liquidations, an S Corp generally does not. 
2. The S Corp Side: The "deemed sale" triggers gain/loss at the corporate level.
3. The Flow-Through: That gain passes through to you via the Schedule K-1.
4. The Shareholder Side: You then report the liquidation of your stock on your personal return (Schedule D), using the cash and FMV of property received as your "sales price" and your adjusted basis in the stock as your "cost.

2. How to Enter this in TurboTax Business

Since these are assets you've already been depreciating or expensing (Section 179 and De Minimis), you shouldn't just "delete" them. You must record the disposition.

1. For Section 179 Property (Form 4797):
2. Go to the Federal Taxes tab -> Deductions -> Depreciation.
3. Select the asset and choose "Dispose of Business Property."
4. Enter the date of liquidation as the date sold.
5. Crucial Step: For the "Sales Price," enter the Fair Market Value of the asset on the day of liquidation.
6. TurboTax will automatically calculate the Section 1245 recapture. Because this is Section 179 property, the gain (up to the amount of depreciation taken) will be "recaptured" as ordinary income.
7. Where it goes: This will populate Form 4797, Part III. This is the correct way to show the IRS the original cost, depreciation, and gain.

For De Minimis Expensed Property: Since these assets have a $0 tax basis and were never on your depreciation schedule, they won't appear in the "Depreciation" section.

1. Go to Federal Taxes -> Income -> Dispose of Business Property (or directly to the Form 4797 entry screen).
2. Enter these as a manual sale.
3. Cost: $0 (since you already expensed the full cost).
4. Sales Price: The FMV of the items.
5. This will also result in an ordinary gain on Form 4797.

3. Why it’s hitting your "Income"

1. In an S Corp, Form 4797 gains are part of your total income, but they are "separately stated items."
2. They will show up on Schedule K, Lines 9 or 10.
3. They will not be on Page 1, Line 1 (Gross Receipts).
4. However, they will increase your basis in the S Corp right before you close it out, which usually offsets the "gain" you recognize when you personally receive the property.

4. The "Deemed Sale" Reality Check

The IRS requires the S Corp to recognize the gain as if it sold the assets. You cannot avoid this gain appearing on the 1120-S. However, if you are the 100% owner:

• The S Corp recognizes the gain (increasing your basis).
• You receive the property (taxable event).

Because your basis increased in step 1, your personal tax hit on the "liquidation" of the stock in step 2 is usually reduced or eliminated.

[user17733503287]

Hi Dave,

Thanks for your reply.  My goal is to have TurboTax report the property liquidation gain as an exchange for my stock and not as ordinary income on my personal return. 

I followed the steps you outlined in Item 2 (How to Enter…).  For line 7 (Where it goes) the sec 179 disposed property gain shows up on K-1, Box 17, code “K” and not on Form 4797.  This results in the gain being treated as income on my personal tax return and not as the gain being treated as an exchange for my stock.

For de minimis disposed property I followed the steps you outlined using Form 4797, Part II.  However, for item 3 (Why it’s hitting…) line 2, the items don’t show up on Schedule K, Lines 9 or 10, rather they show up on 1120-S, pg1, line 4 that is included in line 22 ordinary business income.  This affects the K-1 line 1 ordinary business income which is not correct.

Is there a way to attach a supplemental statement, such as a spreadsheet, to the TurboTax return?  If so I can just list the liquidated property and show the FMV gain.

[DaveF1006]

Yes, you can and absolutely should attach a supplemental statement to a 1120-S, especially for ‌liquidations. However, in the "Business" or "S-Corp" versions of TurboTax, there is no ability to attach forms.  You will need to print and mail your return, with the attachments, along with a letter explaining that you wish to report the property liquidation gain as an exchange for your stock and not as ordinary income on your personal return, and here are the supporting documents to support my filing.

In the meantime, here are some suggestions for moving the gain from ordinary income into a sale of stock. To move the gain from Box 1 (Ordinary) to Box 17 code K (or properly onto Form 4797), try this:

1. For Section 179 Property: If TurboTax is putting this in Box 17, Code K, it’s actually doing what the IRS requires for S-Corps. The recapture of Section 179 is always passed through to the shareholder separately so they can calculate their own recapture at the individual level.
2. For the "Exchange" Treatment: To ensure the gain is treated as an exchange for stock, the corporation should report the distribution of the property at FMV. The gain is calculated as Gain = FMV - Adjusted Basis.
3. Rather than having TurboTax treat the asset as a sale to a third party, record it as a distribution.

If your de minimis items are showing up on Line 4 of the 1120-S, the software sees them as "Other Income" (like a refund or miscellaneous fee).

1. Go back to the "Deductions" section. If these were previously expensed items being "recovered" during liquidation, they are often treated as ordinary income under the Tax Benefit Rule.
2. However, if you want them on Schedule K, you may need to enter them as "Other Portfolio Income" or manually override the summary link if you are using the Forms Mode (only available in the Desktop version).

One last thing to check, since you are using TurboTax Business Desktop, click the Forms icon in the top right.

1. Find Schedule K.
2. Find the line where the income is incorrectly appearing.
3. Right-click the amount and select "Data Source." This will tell you exactly which worksheet is pushing that number there, so you can go back and delete or move it.

[user17733503287]

Okay thanks.  I will report the de minimis expensed property as a property distribution to the shareholder in 1120-S and attach a spreadsheet to my mailed return showing details of each liquidated asset (date acquired, sold, selling price, FMV gain).

I still think I need to report all of the liquidated property (sec 179 and de minimis expensed) on a 1099-DIV so that on my personal return I can treat the liquidation gains as an exchange for my stock on Forms 8949 which goes to Schedule D and is treated as a long term capital gain.

[Rick19744]

You need to go back and read @DaveF1006 replies to make sure that the liquidating distribution is properly flowing through your K-1.

Distributions of property to a shareholder is deemed as a sale of that property to that shareholder; and should be reported as such in TT Business.  

Since you are distributing property in which you claimed depreciation, you need to determine the gain; FMV less basis.  If you claimed Section 179, then your basis on that property is zero.  Just treat this as any other "sale" and allow TT to handle it.

The gain on property being distributed to you is reported on your K-1 "as if" the S corporation sold it.  TT should handle this appropriately as you have potential for recognizing ordinary income on appreciated property distributed that was previously depreciated; depreciation recapture.  All of this gets handled in TT Business so if will properly flow through to your 1040.

Then you need to update your tax basis schedule for the current year K-1 items.

Yes you need to complete and file form 1099-DIV.  This form then provides you with the necessary information to compute your overall gain or loss on the "disposition" of your S corporation investment.

[user17733503287]

Thanks for your reply.  Regarding “…have potential for recognizing ordinary income…”, in my case all the liquidated property had a gain equal to its FMV.   The gain was less than its original cost and all property was fully depreciated (exceeded the useful lifespan), so it would not be subject to depreciation recapture due to disposal before its useful life was reached. 

However the sec 179 disposed property gain gets reported on K-1, Box 17 K.  When I enter that into my personal return it counts as ordinary income.  The 1099-DIV gain gets entered on Form 8949 and Schedule D as an exchange for my stock.  If the gain exceeds my stock basis (disregarding any gain from the liquidated property distribution) I realize a gain and pay tax on that too, so it seems I’m being taxed twice on the property distribution.

I was planning as reporting the FMV (my gain) of all liquidated property to be treated as exchange for my stock and not treated as ordinary income.  I can attach a spreadsheet to my return to show the details of the FMV (my gain) of each liquidated property.  I’m still trying to figure out where to report that on K-1 (I’m guessing Box 16 D).  Does all of this sound correct?

[Rick19744]

I believe you are confusing the two concepts:

• There is a deemed gain at the S corporation level when distributing property.  This is an S corporation level gain that is passed out to you the shareholder.
• This gain increases your basis since it is being passed out as ordinary income.
• So no double tax

[user17733503287]

I am confused.  I think what you are describing would apply if this was not a liquidation and the S Corp was simply distributing property to its shareholders.

For example using your method, say that the S Corp has a net income of $0 prior to liquidation.  The S Corp liquidates property with a FMV of $1,000 and this get reported on K-1 as Box 1 = $1,000 ordinary income which gets entered in 1040 as $1,000 income so I pay tax on the $1,000 FMV of liquidated property I received. 

Let’s say my stock basis is zero prior to the liquidation.  The S Corp gives me a 1099-DIV showing $1,000 property value.  If I were to increase my basis $1,000 (from the income reported on K-1) that would match the distributed property value, so no capital gain. 

The net of all of this is the liquidation is treated as ordinary income, not as an exchange for my stock.