How Do I Report Operating Loss But Gain on Sale of Fully Depreciated Sec. 179 Equipment on Form 1065?

So the gain from selling the equipment gets included in total income even if it was Section 179 deducted years ago? Does this mean we get taxed twice on the same equipment - once when we got the deduction and now again on the sale?

You're not actually getting taxed twice. When you took the Section 179 deduction, you received an immediate tax benefit by deducting the full cost of the equipment instead of depreciating it over several years. This reduced your basis in the asset to zero. When you sell an asset, you're taxed on the difference between the sale price and your adjusted basis. Since your basis is zero due to the Section 179 deduction, the entire sale amount becomes taxable gain. This is essentially recapturing the tax benefit you received earlier. If you hadn't taken Section 179 and instead used regular depreciation, your basis would be higher and your taxable gain on sale would be lower.

Did it help with determining your partner's basis? That's where I'm struggling - I'm afraid we'll mess up our basis calculations when we sell off these assets and have to distribute what's left.

I checked out their website but it's not clear if it helps with winding down a partnership. Did it specifically help with final year returns or just regular operating years?

It absolutely helped with partner basis tracking. The system flagged that we needed to make some basis adjustments before finalizing the K-1s, which probably saved us from an audit. It handles basis increases from contributions and income, and decreases from distributions and losses - and keeps it all straight when calculating the final numbers. For winding down partnerships, yes it definitely helps with that too. It has specific guidance for final returns, including how to check the final return box and how to handle liquidating distributions. It even explained the ordering rules for which expenses get offset by which income types during the wind-down, which was super helpful.

Really? The IRS actually helped with this? I always thought they just tell you to talk to a tax professional for anything complex.

This sounds like a paid ad. No way the IRS gives actual advice on complex partnership issues like Section 179 recapture. They barely answer basic questions when I call.

They absolutely helped! The key is getting to the right department. When I called using Claimyr, I specifically asked for the Business Tax Line. The regular customer service folks might not know the details, but the business tax specialists definitely do. I was surprised too. I came prepared with specific questions about Form 1065 Line 23 and the Section 179 recapture, and the agent walked me through the whole process step by step. They can't do your taxes for you, but they can definitely clarify how specific tax situations should be handled.

Thanks for bringing this up! This is getting complicated fast. How do I determine whether my equipment sale qualifies as Section 1231 gain versus ordinary income? We've owned most of the equipment for 5+ years if that matters.

The timeframe absolutely matters! Generally, if you've held the property for more than one year, the gain is Section 1231 gain (reported on Form 4797 Part I). However, for Section 179 property, there's a recapture provision where the gain up to the amount of the Section 179 deduction is treated as ordinary income, regardless of how long you've held it. Any gain beyond the original Section 179 deduction amount (if you sold it for more than you originally paid) would typically qualify for Section 1231 treatment. Since you've held the equipment for 5+ years, any appreciation beyond your original cost basis would likely get the more favorable tax treatment.

You're right that the basis is zero for fully Section 179 expensed equipment, so any sale amount is entirely gain. For the tax treatment: When you sell Section 179 property, the gain is generally treated as ordinary income to the extent of the depreciation deductions you previously took (this is called "recapture"). So if you Section 179 expensed a $10,000 machine and later sell it for $3,000, that entire $3,000 is ordinary income. However, if you somehow sell it for more than its original cost (say $12,000 for that same machine), the first $10,000 would be ordinary income recapture, and the additional $2,000 might qualify for Section 1231 treatment, potentially giving you capital gain rates on that portion.

That makes sense! Thanks for explaining it so clearly. So basically most of the time when selling fully depreciated business equipment, we're looking at ordinary income. But if we're lucky enough to sell something for more than we paid (rare for most equipment), we might get capital gain treatment on that excess amount.