Form 4797 is an important tax form used to report sales of business property. The IRS requires taxpayers involved in the sale or exchange of business property to file this form with their taxes. Even if you plan to have a tax professional help guide you through Form 4797, which is probably a good idea, you should have an understanding of what this tax form is, as well as when and how to use it.
Sale of business property — sounds simple, right? Wrong. It isn’t as cut-and-dried as one party selling property to another party.
Form 4797, Sales of Business Property, is a form distributed by the Internal Revenue Service (IRS) to report capital and ordinary gains from the sale of business property. The IRS classifies many transactions as Form 4797 tax events. Additionally, several special rules may apply depending on the conditions of a business property sale or exchange.
Keep reading to learn all about this tax form and how it can apply to you, the taxpayer.
What is Form 4797?
Form 4797, Sales of Business Property, is a United States tax form. The IRS requires taxpayers to file Form 4797 to report the sale of business property. Taxpayers who’ve sold business property must fill out this two-page tax form and submit it to the IRS with their other tax documents.
Examples of business property:
Use Form 4797 to report gains or losses from the exchange of property and capital assets.
Typically, sales of business property involve transfers of large sums of money. It is important to consult a tax professional to navigate Form 4797.
When to file Form 4797
There are several instances for which the IRS requires taxpayers to submit Form 4797.
Form 4797 tax events
- The sale or exchange of property
- The involuntary conversion of property and capital assets
- The disposition of noncapital assets
- The disposition of capital assets not reported on Schedule D
- The gain or loss for partners and S corporation shareholders from certain section 179 property dispositions by partnerships and S corporations.
- The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less
- Gains or losses treated as ordinary gains and losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f)
If you’ve participated in any of the above-listed transactions, you will most likely file Form 4797 when you do your taxes for the year.
A tax professional can help assess if your property exchange falls under Form 4797. If you have any questions as to whether you fall under any of these categories, reach out to a professional tax advisor. One convenient way to pay for your tax pro’s invaluable services, and to simplify your record keeping a bit while doing so, is with a business credit card.
Depreciation and Form 4797
Depreciation plays an important role in this tax form. Depending on the classification of your property and transaction, you can lessen your taxable gains by reporting depreciation. If the property has depreciated, the IRS may count this as a deduction.
Exceptions to Form 4797
Form 4797 comes with several special rules outlined by the IRS. Not every business property transaction fits cleanly within the Form 4797 classification.
A tax professional can help you determine if one of these exceptions applies to you.
From 4797 exceptions
- Sale of a home used for business: If your real estate used for business is also your primary residence, you may be able to exclude part or all of your Form 4797 gains. This may apply to self-employed persons or independent contractors.
- Involuntary conversion of property: If your business property undergoes compulsory or involuntary conversions, you may be exempt from paying taxes on associated gains. According to the IRS, “An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award.”
- DC Zone assets sale: If you participated in the sale or exchange of business property in the DC Zone that you acquired between 1997 and 2012, you may be eligible to exclude part of your gains from Form 4797.
Yes, these special rules get very specific. A tax professional can help walk you through any possible exclusions or special rules that may apply to you.
How to file Form 4797
The IRS provides instructions on how to file Form 4797, but they aren’t exactly clear step-by-step instructions. There are plenty of nuances to this process, and you should still consult a tax professional to guide you through.
Information that you’ll need to provide on Form 4797:
Complete the two-page tax return form to the best of your ability using this information. It is prudent to you have a professional tax advisor review your form during or after its completion.
When it is complete, submit it to the IRS along with all of your other applicable tax forms by the deadline, usually April 15. If there are any issues with the form, the IRS will contact you directly via mail or email.
If you do receive an IRS letter or notice, don’t worry. Read this article by SuperMoney and consult your tax advisor to guide your next steps.
Other tax forms you may have to file
If you are required to file Form 4797, you will likely be required to file other specialty tax forms as well. Here are a few forms that you may have to file:
- Form 4684, Casualties and Thefts
- Form 6252, Installment Sale Income
- Form 8824, Like-Kind Exchanges
- Form 4255, Recapture of Investment Credit
- Form 8949, Sales and Other Dispositions of Capital Assets
- Form 8862, Information to Claim Certain Credits After Disallowance
- Form 5498, IRA Contribution Information
- Form 1099-C, Cancellation of Debt
- Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business
- Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan
- Form 8606, Nondeductible IRAs
Importance of tax consultants for your business
Chances are you aren’t an expert on the Internal Revenue Code, the tax code of the United States. Hiring someone who is, such as a Certified Public Accountant or another professional tax advisor, can save you tons of time, money, and stress.
Tax forms such as Form 4797 come with special rules, which can get complicated. If you miss something on your taxes, you may be subject to fines and other consequences. A tax professional can mitigate this risk.
- Form 4797 is a tax form distributed by the IRS that is used to report capital and ordinary gains on the sale of business property.
- The IRS classifies many transactions as sales of business property. Business property includes, but is not limited to, real estate used for rental income, property used for trade or business, and property used for industrial or agricultural purposes, or for resource extraction.
- There are several designations, special rules, and exclusions associated with this tax form. There may also be other associated tax forms that you must file alongside Form 4797. Consult your trusted tax professional to guide you through filling out these forms and filing your taxes.
What is the 4797 form used for?
The 4797 form is used to report gains and losses from the sale of business property.
Who fills out Form 4797?
Any legal owner of a business property who has sold or exchanged such property may be required to fill out Form 4797. Consult a tax professional to confirm whether or not this applies to you.
Where can I get Form 4797?
You can find Form 4797 on the IRS website or by following this link.
Are 4797 gains capital gains?
Capital gains can fall under 4797 gains. This depends on your property use, classification, and transaction.
View Article Sources
- About Form 4797, Sales of Business Property — IRS
- About Form 8606, Nondeductible IRAs — IRS
- Form 4797: Business real estate gains — Corporate Finance Institute
- Form 4797, Sales of Business Property — IRS
- Instructions for Form 4797 — IRS
- Publication 544…Sales and Other Dispositions of Assets — IRS
- IRS Form 1099-C: How to Avoid Taxes on Forgiven or Canceled Debt — SuperMoney
- IRS Form 8300 – The Definitive Guide — SuperMoney
- IRS Letters and Notices: What To Do If You Got One — SuperMoney
- What Is An 8862 Tax Form? — SuperMoney
- What is Form 3922? Transfer of Stock Explained — SuperMoney
- What is IRS Form 5498? — SuperMoney
- What Is Tax Planning? A Guide For Beginners — SuperMoney