Question

When an S corporation distributes property that has depreciated in value (fair market value less than basis) to a shareholder, the S corporation will:

a. Recognize a Loss on Distribution
b. Recognize a Gain on Distribution
c. Not Recognize any Gain or Loss
d. Treat it as a Tax-Free Distribution

Answer 1

An S corporation distributing depreciated property to a shareholder does not recognize any gain or loss on the distribution. The loss remains unrecognized until the property is disposed of by the shareholder.

Step-by-step explanation:

When an S corporation distributes property that has depreciated in value to a shareholder, and the fair market value is less than the basis, the S corporation will not recognize any gain or loss on the distribution. Distributing depreciated property as a dividend to shareholders is typically treated as a return of capital, and the loss on the property remains unrecognized until the shareholder disposes of the property. This is in contrast to a scenario where an asset has appreciated, and a capital gain might be realized when that asset is sold.

When an S corporation distributes property that has depreciated in value (fair market value less than basis) to a shareholder, the S corporation will not recognize any gain or loss. Instead, the shareholder will reduce their basis in the S corporation's stock by the fair market value of the distributed property. This reduction in basis can result in a future higher capital gain when the shareholder sells the stock.