IRS Instruction 1120-S (Schedule D) – If your S corporation sold capital assets, distributed appreciated property, or was previously a C corporation, you likely need to file Schedule D (Form 1120-S). This guide breaks down the 2025 IRS instructions in plain English, with line-by-line explanations and key compliance tips.
Form: Schedule D (Form 1120-S)
Tax Year: 2025
Official IRS PDF: Instructions for Schedule D (Form 1120-S)
What Is Schedule D (Form 1120-S) Used For?
Schedule D reports:
- Short-term and long-term capital gains and losses
- Capital gain distributions
- Gains from installment sales (Form 6252)
- Gains from like-kind exchanges (Form 8824)
- Gains on distributions of appreciated property to shareholders
- Built-in Gains Tax (Section 1374)
Who Must File Schedule D (Form 1120-S)?
You must attach Schedule D if the S corporation:
- Has any capital gains or losses to report
- Recognized built-in gains subject to tax under section 1374
- Distributed appreciated capital assets to shareholders
- Received capital gain distributions (e.g., from mutual funds or ETFs)
Key Concepts You Must Understand
| Term | Holding Period | Tax Treatment |
|---|---|---|
| Short-term capital gain/loss | 1 year or less | Taxed as ordinary income |
| Long-term capital gain/loss | More than 1 year | Generally 0%–20% for shareholders |
| Applicable Partnership Interest (API) | More than 3 years | Long-term only |
Built-in Gains (BIG) Tax
Applies to S corporations that were previously C corporations or acquired assets in a carryover-basis transaction. The recognition period is generally 5 years (tax years beginning after 2014).
How to Complete Schedule D (Form 1120-S) – Line-by-Line?
Part I: Short-Term Capital Gains and Losses
- Lines 1a & 8a: Use only for transactions where basis was reported to the IRS on Form 1099-B/1099-DA without adjustments.
- Lines 1b, 2, 3: Report transactions from Form 8949 (short-term).
Part II: Long-Term Capital Gains and Losses
- Lines 8a & 15a: Same rule as above (long-term).
- Lines 8b, 9, 10: Report from Form 8949 (long-term).
Line 13 (both parts): Capital gain distributions from mutual funds, REITs, etc.
Part III: Built-in Gains Tax (Section 1374)
This is the most complex and critical section.
- Line 16: Net recognized built-in gain (including carryovers)
- Line 17: Taxable income limitation (computed as if on Form 1120, line 28)
- Line 18: Excess net recognized built-in gain → carryover to next year
- Line 19: Deduction for C corporation NOL/capital loss carryforwards
- Line 22: Credit for C corporation general business credits
- Line 24: Built-in gains tax = 21% × (Line 21)
Important: The built-in gains tax is treated as a loss allocated to capital gains on lines 6 and 14.
Special Rules & Recent Updates (2025)
- Digital Assets / Cryptocurrency: New codes G–L on Form 8949/Schedule D for transactions reported on Form 1099-DA.
- Qualified Opportunity Funds (QOF): Deferral + 10-year basis step-up still available. Attach Form 8997.
- Wash Sales: Now apply to digital assets treated as securities.
- QSB Stock Rollover (Section 1045): Can postpone gain — report on Schedule K, line 10.
- Installment Sales: Continue reporting on Form 6252; recognized gain flows to Schedule D.
Common Filing Mistakes to Avoid
- Reporting transactions with basis adjustments on lines 1a/8a (must go on Form 8949)
- Forgetting to carry forward excess built-in gain (Line 18)
- Failing to attach Form 8949 when required
- Not apportioning taxable income correctly when multiple asset groups exist
- Overlooking the 3-year holding rule for carried interests (Section 1061)
Pro Tips for S Corporation Owners
- Always complete Form 8949 first
- Attach Form 8997 if you have QOF investments
- Track your built-in gain recognition period carefully (5-year clock)
- Consider accelerating built-in gain recognition before the period expires (strategic planning opportunity)
Final Keyword Summary:
- IRS Instructions Schedule D Form 1120-S 2025
- S corporation capital gains tax
- Built-in gains tax Schedule D
- Form 1120-S Schedule D instructions
- Section 1374 built-in gains tax
Would you like a version optimized for a specific tax year (2024 or 2026) or focused more heavily on built-in gains planning strategies?