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

[markon]

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!

[tagteam · Accepted solution]

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

[markon]

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?

[tagteam]

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@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?

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Yes, according to the facts you set forth.

[Rick19744 · Accepted solution]

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.

[markon]

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.

[Rick19744]

You are correct in how the balance sheet should be shown.

You will be reporting the FMV of the assets distributed on the 1099-DIV in the appropriate box.

The value of the assets before they were distributed will be reflected on the form 4797 when you show those as "sold".

[markon]

Okay that makes sense. It's all starting to come together. Thanks! I appreciate the help.

[Rick19744]

You are welcome.

[markon]

I'm trying to determine if I will need to complete IRS form 8594 - Asset Acquisition Statement Under Section 1060.

From the form instructions:

Purpose of Form

Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets.

In my case, it is all just standard office equipment. There is no possibility of goodwill being attached. The only thing that gives me pause is that every online resource I read makes blanket statements that if you sell business assets, you need to file both forms 4797 and 8594. Nobody makes reference to the need for goodwill to be attached to the assets, except the IRS in its instructions. I usually do take the IRS literally in situations like this though.

[tagteam]

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@markon wrote:

In my case, it is all just standard office equipment. There is no possibility of goodwill being attached. 

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Correct, because you are distributing the assets to yourself rather than selling them to a third party.

[Rick19744]

Form 8594 is only necessary when as stated in the instructions "...both the seller and purchaser....."

While the rules "deem" that the assets are sold as noted in a prior comment, this is not the same as a buyer and seller for purposes of form 8594.  This would only apply if you actually sold the assets / business to a third party. 

Not required for liquidations, which is represented in your facts.

[markon]

Thanks for the help!

[Anonymous]

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.  that's ok.  some firms I worked for preferred that all equity lines be zero.  usually, capital stock would be positive and retained earnings would be negative by the same amount.  we would eliminate the capital stock and to balance retained earnings would add a line in the M-2, if required, (line 3 other additions) that says liquidation. 

[markon]

I've made alot of ground on this. I've recaptured depreciation as mentioned above, recorded sale of assets to self at FMV, and posted liquidating distributions for remaining assets balances. I'm left with only this on the balance sheet:

Capital Stock:  $100

Paid in Capital:  $2,900

Retained Earnings:  $26,000

Shareholder Distributions:  $(29,000)

Total Equity:  $0

The $(29,000) represents the cash and property liquidating distributions.

My personal basis has always been the retained earnings plus $3000 stock and PIC. So at this point, my basis is $29,000.

Because the gain/loss on liquidation is $0, I'm wondering if this means there is nothing to report on the 1099-DIV?

Thanks for any help!