Early Disposal of Depreciable Equipment

[Uncle Sam]

An electrical contractor purchases a $ 32,000 piece of equipment in 2007.
Since it was a backhoe that required state motor vehicle registration and payment of sales tax (as it was shipped from an out of state seller), client refused to pay sales tax and register in 2007.
It therefore was sitting as an undepreciated asset in 2007, client paid income taxes on $ 32,000 because it couldn't be depreciated (wasn't placed in service).
In 2008 he pays the sales tax and registers with DMV, takes a Sec 179 depreciation deduction for full amount.

In early 2009 - client SELLS the backhoe for $ 5,000.

I understand the depreciation recapture on Form 4797, Part IV - where the difference between the Sec 179 and what the depreciation SHOULD HAVE been had it been depreciated for 5 yr is added back as income on Schedule C.

Does the cost and Sec 179 depreciation vs $ 5,000 get reported in Part I or Part II of Form 4797. Which date controls?
Actual purchase date was 2007, put in service in 2008, sold in 2009.

[AJsTax]

Note:

page 9-16, TTB..If property is sold....... do not figure the recapture amount under the rules explained in this section. "

The entire basis was expensed by Sect 179. thus entire $5000 is gain.
Most likely would report on part III. see page 6-1 for chart.

[Nashville]

Not Depreciable

Emphasis on "SHOULD HAVE" in Uncle Sam's post.

This implies depreciation that was not actually taken but was "depreciable" under recapture rules. However the reasons depreciation was not taken in 2007 were elaborately described in the original post, then the equipment was not depreciable in 2007, so this is not depreciation that "should have" been taken.

Recapture is limited to $5,000, via form 4797, Part III.

By the way, sale of a $32,000 backhoe after less than two years' service for $5,000 doesn't sound reasonable either but there could be any number of reasons that could bring that into the realm of possibility.

[Uncle Sam]

Early Disposal of Depreciable Equipment

Thanks AJ - I have your references copied and put in my file.

What I was referring to in the "should have" meant that if the backhoe was NOT Sec 179'd and depreciated over the 5 year life - 2008's depreciation would have been $ 6,418.
So I figured the recapture was $ 32,000 - $ 6,418

[Nashville]

Wrong Thinking?

I may have been thinking something "wrong" for years, as I imbibe myself deeper in this thread.

Maybe the best way to clear up my head is to present my confusion in question format:

FACTS: A backhoe is purchased for $32,000. Taxpayer deducts s.179 expense the first year the equipment is placed in service. Had the taxpayer elected a long-lived method along with some particular convention, he would have instead accumulated $6,418 in depreciation.

At some point early in the life of the equipment, he sells the backhoe. The amount of depreciation "recaptured" on Form 4797 is:
1) The net selling price or $32,000 whichever is lower.
2) The net selling price or $6,418 whichever is lower.
3) Neither of the above, as the recapture is not reported on a 4797.

p.s. this is not a "stump the band" question. After reading this thread, I'm not sure I know anymore...

[Davc]

Assuming sold more than a year after placed in service the only 4797 reporting is lines 19-25b of 4797. Line 14 of the 1040 would be the lesser of the sales price or 32,000.