How should an S Corporation report the donation of a 100% business use vehicle on Form 1120S when the vehicle was fully depreciated using bonus depreciation?
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To properly report the donation of a 100% business use vehicle by an S corporation on Form 1120-S, when the vehicle was fully depreciated using bonus depreciation, you must address both the charitable contribution and the recapture of depreciation. Here’s a step-by-step explanation, referencing the relevant legal authorities and IRS instructions:
1. Determine the Amount of the Charitable Contribution Deduction
- General Rule: The deduction for a charitable contribution of property is generally the fair market value (FMV) of the property at the time of the contribution. However, if the property is “ordinary income property,” the deduction is limited to the lesser of FMV or the property’s adjusted basis.
- Ordinary Income Property: If the vehicle was fully depreciated using bonus depreciation, its adjusted basis is zero. Under IRC §170(e)(1)(A), the deduction is limited to the adjusted basis if a sale at FMV would have resulted in ordinary income (which is the case here, since all depreciation was taken and any gain would be recaptured as ordinary income).
- Result: The S corporation’s charitable contribution deduction for the vehicle is $0, because the adjusted basis is zero.
2. Depreciation Recapture (Section 1245 Property)
- Depreciation Recapture: When depreciable property (such as a vehicle) is donated, and the FMV exceeds the adjusted basis (which is zero after full bonus depreciation), the difference is subject to recapture as ordinary income under IRC §1245.
- How to Report: The S corporation must recognize ordinary income to the extent of the lesser of (a) the FMV of the vehicle or (b) the total depreciation (including bonus depreciation) previously claimed. Since the adjusted basis is zero, the entire FMV is recaptured as ordinary income.
3. Reporting on Form 1120-S
A. Charitable Contribution Deduction
- Schedule K, Line 12a: Enter $0 for the vehicle donation, as the deduction is limited to the adjusted basis (which is zero).
- Schedule K-1, Box 12: Each shareholder’s pro rata share of the charitable contribution will also be $0 for this donation.
B. Depreciation Recapture
- Form 4797, Part II: Report the disposition of the vehicle. The FMV of the vehicle at the time of donation is treated as the amount realized. The adjusted basis is zero. The entire FMV is reported as ordinary income due to depreciation recapture.
- Schedule K, Line 10 (Other Income): The recaptured amount (FMV) is included in ordinary income and passed through to shareholders on Schedule K-1, Box 10, with the appropriate code and description.
C. Additional Forms and Attachments
- Form 8283: If the claimed value of the donated vehicle exceeds $500, Form 8283 must be completed and attached, even if the deduction is zero, because the FMV exceeds $500. The form should reflect the FMV, the adjusted basis (zero), and the method of valuation.
- Form 1098-C: If the vehicle is a qualified vehicle and the FMV exceeds $500, the S corporation should obtain Form 1098-C from the charity and attach it to the return.
4. Shareholder Reporting
- Schedule K-1: Each shareholder receives their pro rata share of the ordinary income from depreciation recapture (Box 10, code ZZ, with a statement) and the charitable contribution (Box 12, code C or D, which will be $0 for this donation).
- Shareholder Basis: The ordinary income from recapture increases the shareholder’s basis in the S corporation stock; the charitable contribution (if any) would decrease basis, but in this case, it is zero.
5. Summary of Steps
- Determine FMV and adjusted basis (likely zero).
- Charitable contribution deduction is zero (basis is zero).
- Report FMV as ordinary income on Form 4797 due to depreciation recapture.
- Pass through the ordinary income to shareholders on Schedule K-1.
- Attach Form 8283 and Form 1098-C (if applicable).
In summary: When an S corporation donates a fully depreciated vehicle (basis zero) that was used 100% for business and depreciated using bonus depreciation, the charitable contribution deduction is zero, and the FMV of the vehicle is recognized as ordinary income due to depreciation recapture. This is reported on Form 1120-S (Schedule K, K-1, Form 4797), and the appropriate forms (8283, 1098-C) are attached as required.
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