The car was bought in 1998 and is fully depreciated. The cost was $18,729 and have taken $2,341 of section 179 depreciation and rest of $16,388 depreciation by the method of MACRS 200BD MQ. The Kelly Blue Book Value was $1200 but the car needs at least $700(conservatively) worth of repairs with various leaks, hence the S/H bought it for $500 since the business is slowing down drastically.

Is there any gain to be recaptured?

Is there any gain to be recaptured?”===========> Depreciation recapture of Sec. 179 expense for passthrough entities, S corp is required at both the entity and owner levels when the corp disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Sch K-1 . If the corp disposed of Sec. 179 property during the tax year, the amount of the Sec. 179 expense previously passed through to its owners on a Sch K-1 is treated as depreciation and must be recaptured under Sec. 1245 to the extent of any gain realized on the disposition at the owner level. The tax gain /loss on disposition of Sec. 179 assets will not be reported on page 1 of Form 1120S , will not be reported on Sch K, and will not be included on the Form 4797 prepared by the the corp.. The corp will eliminate net book gain or loss on Sec. 179 assets from taxable income and present it on the entity tax return as a Sch M-1 adjustment. The information necessary to calculate the tax gain or loss at the owner level will be reported on a Form 1120S, Sch K-l, in box 17, Other Information, and designated as code K, "dispositions of property with section 179 deductions. Because the S corp must maintain fixed asset depreciation schedules for tax purposes, which includes the Sec. 179 expense deduction, it has the information needed to prepare the supporting schedule necessary for codes K and L items. For example, if you buy tangible personal proeproty for business and trade use for $20,000, the purchase price is $20,000. And assume that the depreciation expense including sec 179 expenses election is $10,000, then the depreciable base or book value of the asset in the year you decide to sell it is $10,000;$20,000-$10,000=$10,000. If you sell the asset for $13,000, then your LTCG is $3,000;$13,000-$10,000=$3,000.Also you need to calculate the amount of deprecation you can recapture,$10,000, as said above. So as $10,000>$3,000; the whole $3,000 is ordinary income. There is no sec 1231 gain. Since the total of the depreciation deductions, $10,000, is greater than the gain realized,$3,000, the entire amount of the gain is reported as ordinary income.
Under the sec 1245 depre. Recapture rules, gains on the disposal of depreciable personal tangible property are taxed a ordinary income as said above,to the extent of the LESSER of 1) the gain, $3,000, in this example, or 2) all depreciation takes, $10,000, in this case , $3,000; as $3,000<$10,000.As you have naturally taken depreciation, you are subject to depreciation recapture if you do an asset sale of your S Corp; Section 1245 includes all types of personal property including cars.So all of the gain on sale of the car, $500, is taxed at ordinary rateasa sec 1245 gain. When section 1245 property is sold or disposed of at a gain, the part of the gain that represents recaptured depreciation or amortization is treated as ordinary income. Form 4797 needs to be used by the S-corp to report gains and losses from sale of depreciable property used in a trade or business. Gain from these sale or disposition is reported in Part III of Form 4797. Shareholders report their gain from owning the car on Form 4797 on their individual tax returns.

Thank you for your prompt reply Wnhough(Moderator).
I have copied/pasted the portion of 4797 filing requirement from the earlier Q where the answer stated below that the form 4797 was not required to be filed. Answer to my Q you have stated that the 4797 is required by the S-Corp as well as the S/H(taxpayer). Can you please explain the difference?
Thank you in advance.

"If the corp disposed of Sec. 179 property during the tax year, the amount of the Sec. 179 expense previously passed through to its owners on a Sch K-1 is treated as depreciation and must be recaptured under Sec. 1245 to the extent of any gain realized on the disposition at the owner level. The tax gain /loss on disposition of Sec. 179 assets will not be reported on page 1 of Form 1120S , will not be reported on Sch K, and will not be included on the Form 4797 prepared by the the corp.. The corp will eliminate net book gain or loss on Sec. 179 assets from taxable income and present it on the entity tax return as a Sch M-1 adjustment. The information necessary to calculate the tax gain or loss at the owner level will be reported on a Form 1120S, Sch K-l, in box 17, Other Information, and designated as code K, "dispositions of property with section 179 deductions".

The sale of the S-corp asset is reported on form 4797 attached to the 1120S tax return. The net gain or loss thus flows thru to the shareholders for taxation by way of form 1120S-K1. I mean Form 4797 needs to be used by the S-corp to report gains and losses from sale of depreciable property used in a trade or business. Gain from these sale or disposition is reported in Part III of Form 4797. Shareholders report their gain from owning the car on Form 4797 on their individual tax returns.However, The tax gain /loss on disposition of Sec. 179 assets will not be reported on page 1 of Form 1120S , will not be reported on Sch K, and will not be included on the Form 4797 prepared by the the corp.. The corp will eliminate net book gain or loss on Sec. 179 assets from taxable income and present it on the entity tax return as a Sch M-1 adjustment. Depreciation recapture of Sec. 179 expense for anS corp is required at both the entity and owner levels when the corp disposes of an asset for which the entity passed through Sec. 179 expense to its owners on a Sch K-1 . If the corp disposed of Sec. 179 property during the tax year, the amount of the Sec. 179 expense previously passed through to its owners on a Sch K-1 is treated as depreciation and must be recaptured under Sec. 1245 to the extent of any gain realized on the disposition at the owner level. If you received a Sch K-1 from an S corp reporting the sale or other disposition of property for which a section 179 expense deduction was previously claimed and passed through to its shareholders, you must report your share of the transaction on Form 4797(whether or not you were a shareholder at the time the section 179 deduction was claimed).