S Corp Sale of Business

[IllinoisTaxMan]

The Client, 100% shareholder of S Corp is considering the sale of business which includes equipments, furniture and inventory by installment sales and then dissolves itself. I wonder if it is possible to do it that way. I heard the S-corp can't sell its business by installment. Any input is appreciated.

[OldJack]

Well... a S-corp can certainly sell assets on the installment basis. However, assets sold that result in ordinary income gain must report the ordinary gain in the year of sale. Form 4797 page 2 determines such ordinary income gains. Any capital gain is reported as received.

As an example, a machine fully depreciated sold for less than original cost would have to recognize any gain in the year of sale (Form 4797) even tho the proceeds from the sale are received in future years. But a capital investment asset (Sch-D), not depreciable, would recognize gain in the year the proceeds are received.

[IllinoisTaxMan]

Well... a S-corp can certainly sell assets on the installment basis. However, assets sold that result in ordinary income gain must report the ordinary gain in the year of sale. Form 4797 page 2 determines such ordinary income gains. Any capital gain is reported as received.

As an example, a machine fully depreciated sold for less than original cost would have to recognize any gain in the year of sale (Form 4797) even tho the proceeds from the sale are received in future years. But a capital investment asset (Sch-D), not depreciable, would recognize gain in the year the proceeds are received.

Do you know any code secton on this? I couldn't find it out.

[jklcpa]

Code sec 453(i) is the section for disposal of recapture property in an instal sale having recapture income from either sec 1245 or 1250 property. Recapture income is the ord income under sec 1245 or 1250 that must be recognized in the year of sale, and any excess of the recapture is reported on the installment method.

The return will contain both Forms 6252 and 4797. Form 6252, line 12 is where the ord inc recapture is reported in the year of sale. It subtracts from the overall profit on the sale, and the gross profit and GP% are reduced accordingly.