IRS Form 1120-S (Schedule D) – IRS Forms, Instructions, Pubs 2026 – In the world of S corporation taxation, accurately reporting capital transactions is crucial for compliance and optimizing tax outcomes. IRS Form 1120-S Schedule D plays a pivotal role in this process, helping S corporations detail their capital gains and losses while addressing potential built-in gains taxes. Whether you’re a business owner, accountant, or tax professional preparing for the 2025 tax year, this guide breaks down everything you need to know about Schedule D, including its purpose, filing requirements, and step-by-step completion tips. We’ll draw from official IRS resources to ensure accuracy and relevance.
What Is IRS Form 1120-S Schedule D?
IRS Form 1120-S Schedule D, titled “Capital Gains and Losses and Built-In Gains,” is an attachment to Form 1120-S, the U.S. Income Tax Return for an S Corporation. Its primary function is to report:
- Overall capital gains and losses from transactions listed on Form 8949 (Sales and Other Dispositions of Capital Assets).
- Specific transactions that don’t require Form 8949, such as capital gains from installment sales (Form 6252) or like-kind exchanges (Form 8824).
- Gains on distributions of appreciated capital assets to shareholders.
- Capital gain distributions.
- Built-in gains subject to tax under section 1374 (Part III of the schedule).
This form ensures S corporations properly account for short-term and long-term capital activities, which flow through to shareholders via Schedule K-1. Unlike C corporations, S corporations are pass-through entities, but they may still face corporate-level taxes on built-in gains from prior C corporation status or certain asset acquisitions.
Capital assets typically include property held by the corporation not connected to its trade or business, such as investments, but exclude inventory, accounts receivable, depreciable business property, and certain intellectual property. For tax purposes, gains or losses are classified as short-term (held one year or less) or long-term (held more than one year), with special rules for applicable partnership interests requiring a three-year holding period for long-term treatment.
Who Must File Schedule D for Form 1120-S?
Not every S corporation needs to file Schedule D. You must attach it to Form 1120-S if your corporation:
- Reports capital gains or losses.
- Has built-in gains subject to tax (e.g., if it was previously a C corporation or acquired assets with a basis tied to a C corporation).
- Received capital gain distributions or made distributions of appreciated assets to shareholders.
This applies during the “applicable recognition period,” generally five years from the S election date or asset acquisition. If your S corporation has no such transactions, you can skip filing Schedule D. Always consult the latest IRS guidelines, as exceptions may apply for certain timber, coal, or iron ore transactions not subject to built-in gains tax.
Key Components of Schedule D: Breaking Down the Parts
Schedule D is divided into three main parts, each addressing different aspects of capital transactions. Before diving in, complete any required supporting forms like Form 8949, which details individual sales and exchanges.
Part I: Short-Term Capital Gains and Losses
This section covers assets held for one year or less. Key lines include:
- Line 1a: Aggregate totals for transactions where basis was reported to the IRS on Form 1099-B (no adjustments needed).
- Lines 1b, 2, 3: Totals from Form 8949, including new codes (G through L) for digital asset transactions starting in 2025.
- Line 4: Gains from Form 6252 or Part I of Form 4797.
- Line 5: Gains or losses from Form 8824.
- Line 6: Any capital loss carryover or built-in gains allocation treated as short-term loss.
Combine these to calculate net short-term gain or loss on line 7.
Part II: Long-Term Capital Gains and Losses
Similar to Part I but for assets held more than one year:
- Line 8a: Aggregate totals without Form 8949.
- Lines 8b, 9, 10: From Form 8949, with digital asset codes.
- Line 11: Gains from Form 6252 or Part II of Form 4797.
- Line 12: Gains or losses from Form 8824.
- Line 13: Capital gain distributions.
- Line 14: Capital loss carryover or built-in gains allocation as long-term loss.
Net long-term gain or loss is on line 15. Report collectibles (e.g., art or coins) separately on Schedule K, line 8b, as they may be taxed at 28%.
Part III: Built-In Gains Tax
This part calculates corporate-level tax on net recognized built-in gains:
- Line 16: Net recognized built-in gain (attach computation).
- Line 17: Taxable income considering only built-in items.
- Line 18: Excess carryover to next year.
- Line 19: Deductions from C corporation years (NOL or capital loss carryforwards).
- Line 22: Credits from C corporation years.
- Line 23: Final built-in gains tax, treated as a loss on Parts I/II or as an ordinary deduction.
The tax rate is typically the corporate rate (21% for 2025), but deductions and credits can reduce it.
Step-by-Step Guide: How to Fill Out Schedule D
- Gather Documentation: Collect Forms 1099-B, 1099-DA (for digital assets), and records of all capital transactions.
- Complete Supporting Forms: Fill out Form 8949 first, then Forms 6252, 4797, 8824, or 8997 (for Qualified Opportunity Funds) as needed.
- Enter Data in Parts I and II: Report totals and calculate nets. Round to whole dollars.
- Handle Special Items: Adjust for wash sales, nonbusiness bad debts, or QOF deferrals (elect within 180 days; permanent exclusion after 10 years).
- Compute Part III if Applicable: Attach a detailed breakdown of built-in gains/losses.
- Attach to Form 1120-S: Report totals on Schedule K and K-1 for pass-through to shareholders.
For digital assets, use new reporting codes and consult Form 1099-DA. If disposing of QOF investments after seven years, check for basis adjustments.
Common Mistakes to Avoid When Filing Schedule D?
- Misclassifying Holding Periods: Ensure applicable partnership interests meet the three-year threshold for long-term status.
- Overlooking Adjustments: Forget codes for wash sales (code W) or QOF rollovers (code R).
- Ignoring Built-In Gains: Former C corporations often miss the five-year recognition period.
- Failing to Report Digital Assets: With new 2025 codes, underreporting can trigger audits.
- Not Attaching Computations: Part III requires detailed attachments for built-in gains.
Always double-check for exclusions like DC Zone or qualified community assets (if held over five years).
Recent Changes for 2025 Tax Year
The 2025 instructions introduce codes G-L for digital asset transactions, reflecting increased IRS focus on crypto and similar assets. Wash sale rules no longer apply to certain money market fund redemptions after October 2, 2023. QOF investors may qualify for basis increases after seven years. Stay updated via IRS.gov for any post-publication changes.
Final Thoughts: Ensure Compliance and Download the Form
Mastering IRS Form 1120-S Schedule D is essential for S corporations handling investments or transitions from C status. By accurately reporting capital gains, losses, and built-in gains, you can minimize tax liabilities and avoid penalties. For the official form, download the PDF here: https://www.irs.gov/pub/irs-pdf/f1120ssd.pdf. Consult a tax advisor for personalized advice, as this article is for informational purposes only. For the full instructions, visit IRS.gov/Form1120S.