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Do You Know How Your Tax Planning Software Calculates and Reports Gains?

Understanding how gains should be taxed – and knowing where those gains should be recorded on the tax return – is not always straightforward. A good tax preparation software will make the reporting process much simpler, but it’s important that you understand how each form works. This knowledge can help you verify that your clients’ gains are being classified correctly, but more importantly, it can help you provide your clients with even better tax planning advice as you use tax planning software.

Form 8949

Form 8949, Sales and Other Dispositions of Capital Assets, is a relatively new tax form. It was released in 2011 to help the IRS better track and verify sales of personally held capital assets.

The information requested on Form 8949 closely aligns with the information that is reported on Form 1099-B. Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, is used by most brokers to report sales of stocks, bonds, derivatives, and other securities. By making Form 8949 mirror Form 1099-B, the IRS can electronically verify that all sales are being reported. Prior to 2011, stock sales were reported directly on Schedule D.

Form 8949 requires you to list – in detail – your client’s capital asset transactions. Part I and Part II of the tax form look identical, but Part I reports transactions of capital assets your client held for one year or less (i.e., short-term assets) while Part II reports transactions of capital assets that your client held for more than one year (i.e., long-term assets). The form requests the following from each asset sale:

  • Description of the property
  • Date acquired
  • Date sold or disposed
  • Proceeds from the sale
  • Cost basis of the asset
  • Adjustments to the gain or loss
  • Final gain or loss

Another important aspect of this form is identifying whether these transactions were reported on a Form 1099-B. By marking the appropriate box, you can tell the IRS whether your clients’ transactions were (1) reported on a Form 1099-B that was sent to the IRS, (2) reported on a Form 1099-B that was not sent to the IRS, or (3) not reported on Form 1099-B at all. If your clients are reporting transactions that fall into two or all three of these categories, you will need to file multiple pages of Form 8949.

Form 8949 can feel overwhelming if your client is reporting a large volume of asset sales. Fortunately, there are a few shortcuts. If your client was given a 1099-B that was sent to the IRS and showed the cost basis of each asset, you do not have to record each transaction; you can simply record the summary. This summary can be recorded on Form 8949, or you can report it directly onto Schedule D: Line 1a for short-term transactions, Line 8a for long-term transactions.

Form 4797

While Form 8949 is used to report sales of personally held capital assets, Form 4797 is used to report sales of business property. Form 4797, Sales of Business Property, can be used by a business – like a partnership or an S corporation – or it could be used by an individual that is running a business. An individual would likely only use this form if their business activity were reported on Schedule E (a rental business) or Schedule C (a sole proprietorship).

Form 4797 is grouped into four parts:

Part I: Sales of Business Property Held for More than One Year

Sales of depreciable business property that had been held for more than one year will get reported on Part I.

Part II: Ordinary Gains and Losses

Sales of depreciable business property that had been held for one year or less will get reported on Part II.

Part III: Dispositions of Property under Sections 1245, 1250, 1252, 1254, and 1255

Sales of property under any of the listed code sections will get reported on Part III. Gains and losses under these code sections are netted and taxed differently than other property sales, so the IRS wants to see them listed separately.

Part IV: Recapture Amounts

If property is used for both personal and business purposes, some of the depreciation expense is nondeductible. Part IV is where taxpayers should report depreciation recapture on these assets.

Sales of oil, gas, geothermal, and other mineral properties – even if personally held – are also reported on Form 4797.

Schedule D

Schedule D, Capital Gains and Losses, summarizes Form 8949 and is the landing zone for all capital transactions that are not reported on Form 8949. This includes:

  • Gains from Schedules K-1 – Your client’s share of gains from a partnership, S corporation, estate, or trust should be reported to them on a Schedule K-1. The character of these flow-through gains carries over from the reporting entity, so make sure you’ve classified the short-term and long-term gains correctly in your tax software.
  • Capital gain distributions – Capital gain distributions are taxable payments from a mutual fund relating to asset gains that they hold. Your client may have capital gain distributions even if they didn’t sell any stock. These gains are taxable even if they are reinvested into the fund.
  • Capital loss carryovers – If a taxpayer’s capital losses exceed their capital gains by more than $3,000 in a given tax year, they must carry over those excess losses to future years. These losses can offset future capital gains but cannot be used to offset ordinary income like W-2 wages or ordinary income from a business.

Optimize Your Tax Software

Your tax software is only as accurate as the information you give it. Take the time to ensure you’re inputting your clients’ information accurately. If you have a good idea where each gain or loss will be reported on the tax return, you can more easily spot-check your software for accuracy.But tax preparation is only one aspect of your business. As your client’s advisor, you should also help them plan and prepare for future tax liabilities. Gains and losses can be useful tax planning tools. Although not all gains and losses can be planned, many of your clients will be able to accelerate or delay gain/loss recognition to complement their long-term tax plan. If you have a strong tax planning software like ours at Corvee, you can help your clients plan their gain/loss recognition over the next three, five, or ten years to optimize their tax positions over time. If you would like to request a demo of our tax planning software, reach out to us today and we’d be happy to show you how your clients’ capital gains can be a useful tax planning tool in your arsenal.

Learn How Your Clients’ Capital Gains Can Be a Useful Tax Planning Tool With Corvee Today!

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