Did you purchase or sell a property that was used for business purposes within the past twelve months? If so, you will need to fill out IRS Form 4797: Sales of Business Property. The purpose of Form 4797 is to report any financial gains from your transaction to the IRS. You will need to file this particular form in addition to your standard tax return, which is the Schedule D (Form 1040 or 1040-SR). The Schedule D includes your personal gains, and Form 4797 includes gains from the sale of the business property.
Form 4797 can be confusing because it requires quite a bit of information, some of which you might not be familiar with. For example, gains or losses from Section 179 deductions and recapture amounts need to be reported. In addition, there are certain types of property that might be eligible for a tax exclusion. Fully understanding IRS Form 4797 takes time, and you will most likely need to have an accountant or a tax professional assist you when you file your taxes. In the meantime, this blog article from Balboa Capital takes a close look at Form 4797 and explains it in simple terms.
What is IRS Form 4797?
As mentioned above, IRS Form 4797 is required if you buy or sell a business property. The types of property include general rental income and property used for agricultural, industrial and extractive resources (minerals, oil, etc.) The form is comprised of four different parts, and there is specific information needed based on the type of business entity you have (Corporation, sole proprietorship, partnership, etc.) Basic information that is required on Form 4797 includes the property description, purchase price and date, and depreciation amount. You might also need to report the following, if applicable:
- Sales or exchanges of property used in a trade or business
- Involuntary conversions of property, along with capital assets
- Ordinary gains and losses
- Gains from sale of property under Sections 1245, 1250, 1252, 1254, and 1255
- Recapture amounts under Section 179 and 280F(b)(2) if the business use of the Section 179 property decreased below 50%
Property that is used partially for business might qualify for tax exclusion. For example, if a self-employed graphic designer who works from home sells their property, any gains from the sale might be excluded from being taxed.
This is where Form 4797 can become complicated. If the business property that you buy or sell includes depreciable property (e.g., business equipment, vehicles or technology) in the same transaction, you will need to calculate the fair market value (FMV) of each to determine how much of the gains can be recaptured as ordinary income. As you know, business equipment depreciates over time and becomes less valuable. Once you have these figures, you will need to report them in the appropriate section of Form 4797.
Reporting installment payments.
In the event that you sell a business property at a profit, and you will be receiving one or more payments after the end of the tax year in which the sale occurred, you will typically need to report the installment payment(s) to the IRS. Discuss this with your accountant or tax advisor, as they will be able to determine what needs to be done. Installment sale income is reported on IRS Form 6252, which needs to be attached to your tax return.
Not all business property sales are the same. Some are relatively simple and can be carried out between two business owners, whereas others are more involved and need to be handled by a business management group or an outside third party. These include property sales that involve things like equipment, inventory, multiple locations, patents, and trademarks. To make sure everything goes smoothly when buying or selling a property that is used for business, it is a good idea to hire an accountant and/or a business attorney.
An accountant can provide you with all of the financial information relating to the property sale, such as income and expense reports. A business attorney will provide you with peace of mind; they will thoroughly review the transaction, draft the appropriate legal contracts, and help protect you from litigation.