A taxpayer disposes of business assets during the year and must report the transactions on the correct part of Form 4797. The taxpayer is unsure where a gain that is recaptured as ordinary income under Section 1245 is computed on the form. Which part of Form 4797 is used to figure the ordinary income recapture portion of the gain?
- APart I, which reports Section 1231 transactions before any netting of gains and losses.
- BPart II, which reports ordinary gains and losses that are not subject to recapture computations.
- CPart III, which computes the Section 1245 and Section 1250 recapture and carries the ordinary portion forward. Correct
- DPart IV, which recaptures amounts expensed under Section 179 and the Section 280F listed-property rules.
Why A is wrong: Part I handles Section 1231 transactions and the net result flows there, which makes it tempting, but the recapture itself is computed in Part III, so this part is the wrong place for the ordinary income calculation.
Why B is wrong: Part II reports ordinary gains and losses, so it sounds right for ordinary income, but the Section 1245 recapture amount is calculated in Part III and only then carried to the ordinary income line, making Part II incorrect for the computation.
Why C is correct: Part III of Form 4797 is where depreciation recapture under Sections 1245 and 1250 is calculated, with the ordinary income portion carried to Part II and any remaining Section 1231 gain to Part I; this is correct.
Why D is wrong: Part IV handles recapture of Section 179 and listed-property deductions when business use drops, which is a tempting near-match, but ordinary recapture on a sale under Section 1245 is computed in Part III, so this is wrong.