Overview
Corporations

Thinking of owning your own business? Opening your own business is exciting and thrilling. It's everything that comes after the excitement and thrill has worn off that dictates whether a small business will make it or not. It's up to you to maintain and stretch out the "thrill and excitement" period forever.  

You need to file Schedule D with your federal income tax return when you have capital gains and losses. These include:

Gains or losses on the sale or exchange of capital assets you hold for personal or investment purposes, and not for business or profit, Gains or losses on the involuntary conversion of capital assets you hold for personal or investment purposes, Capital gain distributions that you cannot report directly on Form 1040, Other capital gains and losses that you are not required to report on another form or schedule, Non-business bad debts.

Sale or Exchange of Capital Assets Held for Personal or investment Purposes

A sale is a transfer of property for money or for the promise to pay, such as a mortgage or other debt. An exchange is the transfer of property for other property or services.

Gain or loss on either a sale or exchange is determined as the difference between what you realize; that is, the total money and fair market value of the property and services you receive; and your adjusted basis in the property you give up. Your adjusted basis is generally your cost or other original basis (depending on whether you acquired the property by purchase, transfer, gift, inheritance, etc.), plus certain additions, such as improvements, and minus certain deductions, such as depreciation or casualty losses.

Certain exchanges may be nontaxable, such as like-kind exchanges in which property held for investment or for productive use in a business or trade is exchanged for property of the same nature or character.

What is a Capital Asset?

In order to know how a gain or loss on the sale, exchange, or disposal of property has to be reported for tax purposes, you must first determine whether the property is a capital or non-capital asset. Gains or losses on capital assets are referred to as capital gains and losses, and are generally subject to special tax rates. Gains and losses on non-capital assets are referred to as ordinary gains and losses, and are generally taxed at the normal rate that applies.

Personal and Investment Property

Most of the property you own and use for personal purposes, or investment is considered a capital asset. Capital assets would include your house, furniture, car, boat, stocks, bonds, and other investments, for example. When you sell any of these assets, any gain you have is a capital gain and should be included on Schedule D.

Selling Your Home

Gain on the sale of your home may qualify for an exclusion. This is explained in Internal Revenue Service (IRS) Publication 523, Selling Your Home. If you do not qualify for the exclusion, or if your gain is more than the amount you can exclude, you would report the taxable gain on Schedule D.

Property Converted from Business Use to Personal Use

If you have a gain on the sale of an asset that you converted from business use to personal use, part of the gain may correspond to deprecation you had taken previously. This part of the gain may have to be “recaptured” and taxed as ordinary income. In this case, you would have to use Part III of Form 4797, Sales of Business Property, to determine the amount that has to be recaptured.

Property Used for Both Personal and Business or Rental Purposes

If you have a gain or loss on the sale or exchange of property you use partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as if you sold two separate pieces of property. You will need to allocate the selling price, selling expenses, and basis between the personal and business portions of the property and calculate the gain or loss on the personal and business or rental portions separately. The basis of the business or rental portion must be reduced by any depreciation you have taken on the property.

Gain or loss on the business or rental portion is either capital gain or loss, or ordinary gain or loss. Any gain on the personal portion is a capital gain, and a loss on the personal portion is not deductible.

Gains or losses on Involuntary Conversions

An involuntary conversion refers to property that is destroyed, stolen, condemned, or disposed of under threat of condemnation. As mentioned above, in the case of involuntary conversions resulting from casualties (such as storms or fire) or theft, Form 4684 may need to be filed.

Condemnations

A gain or loss from an involuntary conversion, such as a condemnation, is usually recognized for tax purposes, unless the property is your main home. The condemnation would effectively be treated as a forced sale. To determine whether you have a gain or loss from a condemnation, you would subtract your adjusted basis in the property from the amount of the net condemnation award. If the net condemnation award is more than your adjusted basis, you have a gain. You can postpone recognition of the gain for tax purposes by purchasing replacement property. If the net condemnation award is less than your adjusted basis, you have a loss. If you held the property for personal use, the loss is not deductible.

If the property condemned was your home, and you had a gain on the condemnation, you can exclude the gain to the same extent you could have excluded it if you had sold or exchanged your home.

Capital Gain Distributions

Capital gain distributions may be paid by mutual funds, other regulated investment companies, or real estate investment trusts (REITs). These distributions are made from the fund’s net realized long-term gains. If the distributions are net realized short-term capital gains, they are reported on Form 1099-DIV as ordinary dividends rather than capital gains, and must be reported as dividend income, not taxable at capital gain rates.

Ordinary Dividends and Qualified Dividends

The Form 1099-DIV that you receive may have different amounts reported. The amount that is reported in box 1a is the amount of ordinary dividend income. This amount would be reported on the appropriate line of Form 1040A or 1040, and on Schedule B, Interest and Ordinary Dividends, if you had over $1,500 of interest income or over $1,500 of ordinary dividend income.

The amount reported in box 1b are “qualified dividends” that may be eligible for special 15% or 5% capital gain rates. These would go into the “Qualified Dividends and Capital Gain Worksheet” (in the instructions for Form 1040), or the “Schedule D Tax Worksheet” (in the instructions for Schedule D) to figure the tax. The amount to be included in capital gain distributions on Schedule D is reported in box 2a of Form 1099-DIV. These capital gain distributions are reported as long-term capital gains, regardless of how long you owned your shares.

Other amounts that may be reported on Form 1099-DIV:
The amount shown in box 2b should be entered into the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D.
The amount in box 2c may qualify under the Exclusion of Gain on Qualified Small Business (QSB) Stock.
The amount in box 2d should be entered into the 28% Rate Gain Worksheet in the instructions for Schedule D.
You may not need to file Schedule D if both of the following apply:
The only amounts you have to report on Schedule D are capital gain distributions from box 2 a of Form 1099-DIV.
You do not have any amount reported on Form 1099-DIV as unrecaptured section 1250 gain, section 1202 gain, or collectibles gain (28% gain).
If both of the above apply, enter your total capital gain distributions on the line for “Capital gain or (loss)” on Form 1040, check the box on that line, and use the Qualified Dividends and Capital Gain Tax Worksheet to figure your tax.

Undistributed Capital Gains

Undistributed capital gains, reported on Form 2439, must be treated as distributions, even though you did not actually receive them. The amount reported in box 1a of Form 2439 represents your share of the undistributed long-term capital gains of the regulated investment company (including a mutual fund) or real estate investment trust.

Other amounts that may be reported on Form 2439:
If there is an amount in box 1c, include it in the Qualified 5-Year Gain Worksheet.
If there is an amount in box 1d, include it in the Unrecaptured Section 1250 Gain Worksheet.
If there is an amount in box 1e, see Exclusion of Gain on Qualified Small Business (QSB) Stock.

Business Property

If you have gains or losses on the sale, exchange, or involuntary conversion of capital and non-capital assets used in your trade or business, you may have to file Form 4797, Sales of Business Property. Business property would include inventory held for sale to customers, accounts and notes receivable, real estate and depreciable property used in your trade or business, and copyrights or similar intellectual property, among others.

Depending on the circumstances, the gain or loss on the sale, exchange, or disposal of business property may be a capital gain or loss, or ordinary income or loss. You would also use Form 4797 to report ordinary loss on the sale, exchange, or worthlessness of small business investment company (section 1242) stock, and small business company (section 1244) stock. The section numbers come from the IRS codes where these provisions are legally established.

Securities Trader

If you are considered to be a trader in securities, just like an investor, you must report each sale of securities on Schedule D and D-1. Schedule D-1 is a continuation form with additional lines, if you do not have enough room on Schedule D. You can also use an attached statement of your own.

But if as a trader you make a mark-to-market election, each transaction is reported in Part II of Form 4797 instead of on Schedules D and D-1.

Other Schedules You May Need To Use

If you have installment sales, (a sale in which you will receive a payment in a tax year after the year of sale) you may need to complete Form 6252, Installment Sale Income.

If you have involuntary conversions due to casualty or theft, you need to file Form 4684, Casualties and Thefts. If you have gains and losses from section 1256 contracts and straddles, you would file Form 6781. Section 1256 contracts include regulated futures contracts, foreign currency contracts, non-equity options, dealer equity options, and dealer securities futures contracts.

Use Form 8824 to report like-kind exchanges, when you exchange business or investment property for a similar type of property.

After completing the above schedules, as required, the results are consolidated on Schedule D. Also, gains or losses from partnerships, S Corporations, estates and trusts, as reported on schedule K-1 are included on a separate line on Schedule D.

Non-Business Bad Debts

Non-business bad debts are treated as short-term capital losses. In order to be deductible, they must be totally worthless. The debt must be genuine – there must be a valid and enforceable obligation to pay a certain amount of money. And you must have a basis in the debt; that is, it must have been made from money you already included in your income, or that you loaned out of your cash.

You can report a loss for a non-business bad debt when it becomes worthless. You do not have to wait until the debt becomes due in order to determine it is worthless. You must show that you have taken reasonable steps to collect the debt.

Short-term or Long-term Capital Gain or Loss

Once you have identified the capital gains and losses on personal and investment assets that you need to report on Schedule D, you must then separate them into short-term and long-term capital gains or losses.

You do this based on how long you held, or owned the property. If you held the asset for one year or less, the gain or loss is short-term, and if you held the asset for more than one year, the gain or loss is long-term. The holding period starts the day after your received the property and includes the day you sold or disposed of it. If you acquired the property by inheritance, any gain or loss is long-term regardless of how long you held the property.

If you have long-term gains and losses, you must identify your 28% rate gains and losses. And, if you end up with a net capital gain, you must also identify your qualified 5-year gain and any unrecaptured section 1250 gain.

28% Rate Gains

The 28% rate applies to “collectibles” gains from the sale or trade of works of art, antiques, metals such as gold and silver, gems, stamps, and coins.

Qualified 5-Year Gains

If you have a gain on the sale of qualified small business stock that you held for more than 5 years, you can exclude half the gain from your income, and the other half is subject to the 28% rate.

Section 1250 Gains

Generally, when you sell real property, the part of your gain that corresponds to depreciation is recaptured. You would use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions to figure the tax on this part of your gain.

Partnership Interests

If you sell or dispose of an interest in a partnership, you may have ordinary income, collectibles gain taxed at 28%, or unrecaptured section 1250 gain. These should be reported on the Schedule K-1 you receive from the partnership.

Nondeductible Losses

Losses on the sale of capital assets held for personal use are not deductible. But if the loss is on the sale or exchange of real estate, and you receive a Form 1099-S, you have to report the transaction on Schedule D for informational purposes, even though you cannot deduct the loss.

Related Parties

Generally, losses from the direct or indirect sale or exchange of personal, investment, or business property between related parties are not deductible. For this purpose, related parties include members of a family; a corporation and a person who owns more than 50% of the stock; grantors, fiduciaries and beneficiaries of a trust; the executor and beneficiary of an estate; and an individual and a tax-exempt organization controlled by the individual or the individual's family.

At-Risk and Passive Activity Rules

If you dispose of an asset from an activity that is subject to the at-risk rules and you have a loss, you may need to complete Form 6198, At Risk Limitations, to determine how much of the loss is deductible. Then, if the loss is deductible under the at-risk rules, it may be subject to the limitations on passive activity losses. You may have to file Form 8582, Passive Activity Loss Limitations.

Capital Losses

If your capital losses are more than your capital gains, you can claim a capital loss deduction. The allowable capital loss deduction, figured on Schedule D, is the lesser of the actual net loss or the yearly limit ($3,000, or $1,500 if married filing separately).

Loss Carryovers

If your actual net loss is more than the limit, you can carry over the unused part of the loss to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up. When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it. The loss that you carry over retains its status as either a long-term or short-term loss.

Abandoned Property

If your actual net loss is more than the limit, you can carry over the unused part of the loss to the next year and treat it as if you had incurred it in that next year. If part of the loss is still unused, you can carry it over to later years until it is completely used up. When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it. The loss that you carry over retains its status as either a long-term or short-term loss.