Most businesses own some form of property. Inevitably, many businesses sell their property at some point. When they realize a gain on sale, the IRS wants its cut of the income. Accordingly, businesses need to report gains on the sale of business property when they file their annual tax returns. They report this information on IRS Form 4797, Sales of Business Property.

We’ll cover this important IRS form and best practices for tracking business property sale income in general. Here’s a quick rundown of what we’ll cover:

• Who Should Use IRS Form 4797?
• Should I Use Schedule D or Form 4797?
• What Do I Need to Complete Form 4797?
• How Do I File Form 4797?
• Final Thoughts

Who Should Use an IRS 4797 Form?

If you A) own a business, and B) own property in that business, you’ll eventually need to use a 4797 form. Taxpayers use this form to report any gains made during the sale of business property. For example, if you own an income-generating rental property, that qualifies as business property. As a result, when you sell this property at a gain, you’ll report that gain on Form 4797.

But, business owners also use Form 4797 to report the sale of business property that results in a loss. For instance, say that your plumbing business owns a fleet of vans used to make service calls. If you sell one of these vans at a loss, you’ll also report that loss on the form. The type of property and duration owned will dictate how the IRS treats these losses.

According to the IRS, you should use your 4797 form to report all of the following: 

• The sale or exchange of property.
• The involuntary conversion of property and capital assets.
• The disposition of noncapital assets. 
• The disposition of capital assets not reported on Schedule D.
• The gain or loss for partners and S corporation shareholders from certain section 179 property dispositions by
  partnerships and S corporations.
• The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less.
• Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f).

Should I Use Schedule D or Form 4797?

As outlined above, the IRS requires business owners to use Form 4797 to report the disposition of capital assets not reported on Schedule D. This begs the question, when should you use Schedule D versus Form 4797?

These two forms share one common trait: taxpayers use them to report gains on property sales. But, a major difference between them exists. Schedule D reports sales of property used for personal use, while Form 4797 reports the sale of property used in a business capacity.

The IRS includes the following items as capital assets generally used for personal use: 

• Home
• Car
• Artwork
• Collectibles
• Stocks and bonds

If you sell any of the above personal-use items for a gain, you’ll report that capital gain on Schedule D. Of note, you cannot deduct losses on the sale of personal use capital assets, meaning you do not need to report those losses.

Alternatively, say your business owns a piece of industrial equipment. You decide to sell this equipment, realizing a gain in the process. Due to the fact that you used this equipment in your business, you will report the gain on your 4797 form. And, if you realized a loss on the sale, you would still report that on Form 4797, as business losses are deductible.

But, assume you owned a duplex, living in one unit and renting the other to a tenant. In this case, the capital asset serves both a business and personal use purpose. Therefore, when you sell this property, you’ll need to allocate the gains between both Schedule D and Form 4797.

What Do I Need to Complete a 4797 Form?

As with all tax forms, you’ll need your business’s basic information when completing Form 4797 (e.g. taxpayer ID, business name, etc.). Specific to the sale of business property, you’ll need the following information: 

• Description of the property sold
• Original purchase date of the property
• Sale or transfer date
• Cost of purchase plus any capital improvements
• Gross sales price
• Depreciation amount 

From an organizational perspective, it helps to maintain information on each capital asset used by your business. That is, rather than gather the above information when you sell, maintain a spreadsheet or other form to track this information continuously. That way, when you sell property, you simply need to reference that tracker. This approach is far easier than digging through your records for the necessary information.

How Do I File Form 4797?

This form has four parts. Business owners will report the majority of property held for more than a year in Part I, Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other Than Casualty or Theft. But, depending on your unique circumstances, there’s a chance you’ll also need to enter information in the subsequent three sections.

After you complete the form, you can file it with their annual tax return. Then, you attach it to your personal or corporate tax return, depending on how you’ve organized your business.

NOTE: While the concept behind Form 4797 proves straightforward, the form itself can seem complicated. If you’d like assistance completing the form, Tax Hack can help. Contact us today.

Final Thoughts

As business owners, you’ll inevitably use some sort of property in your day-to-day operations. When you eventually sell that property, you’ll report the sale to the IRS on Form 4797. And, depending on how long you held the property, the gains and losses will receive particular tax treatments.

Reporting property sales and understanding the tax consequences can seem confusing, but tax planning shouldn’t be a daunting challenge for small business owners. At Tax Hack, we live and breathe property sales for businesses, so contact us to set up a tax planning strategy session!