Sale of Business Vehicle -- Standard Mileage

[Koss]

Client sold a truck.

Original purchase price was 13,000.

Sales price was 10,000.

The standard mileage rate includes a depreciation component. The basis of 13,000 gets adjusted to reflect the depreciation that is built into the standard mileage rate.

The mileage was so high that the depreciation is greater than the purchase price of $13,000.

So the adjusted basis of the asset, mathematically, is less than zero.

Here's the question:

IRS Publication 463 says that when you use the standard mileage rate and then sell the vehicle, you adjust your basis using the portion of the mileage that represents depreciation, but not below zero.

My software is using the negative basis on Form 4797.

The instructions for Form 4797 say nothing about this. In Part III, for line 24, it simply says to subtract line 22 from line 21. It does not not say "if the result is zero or less, enter zero." There is no discussion of this in the detailed IRS instruction booklet, either.

If Pub. 463 is correct, then the form instructions are weak, and my software is wrong, because it is following the form line-by-line.

Any thoughts on this would be appreciated.

BMK

[Koss]

Clarification

My original post wasn't very coherent.

My question is: When selling a business use vehicle for which the standard mileage rate was used, is it possible for the basis to be negative, and if so, does this result in additional taxable gain?

I'm providing links to the worksheet that my software uses, and to the output on Form 4797. The worksheet shows a gain of $10,325.00, but the program is reporting a gain of $13,388.00 in Part III of Form 4797.

You'll need to flip to page 2 of the Form 4797. And on the screenshot of the worksheet, you'll need to enlarge the image, and scroll to the left, because I use a dual monitor configuration...

Thanks for any help on this.

http://sgaweb.net/egx45/Worksheet.pdf

http://sgaweb.net/egx45/Form_4797.pdf

BMK

[MilTaxEA]

Basis can be reduced down to zero, but no lower. However you can still use the full SMR (including depreciation portion) when deducting mileage even if your basis is zero. This is why I almost always recommend that my clients use the SMR for the first year they use the vehicle, and then switch between actual or SMR based on which is better in all the future years.

[MilTaxEA]

I would override the software. Software and IRS instructions are not renown for always being correct. That is why we are paid the big bucks.

[AZ-Tax]

Std vs Actual

This is why I almost always recommend that my clients use the SMR for the first year they use the vehicle, and then switch between actual or SMR based on which is better in all the future years.

I guess I need a refresher course. I was under the impression if TP or Spouse initially selected Std or Actual, the selection stayed with the vehicle for the life of the business vehicle.

[MilTaxEA]

If you start with actual, then you are stuck with that forever. If you use standard for the first year, you can switch back and forth at whim in the future years. However, you will be stuck with straight-line depreciation when using actual expenses for any of those years. Most software I have seen has an "optimize" check box that automatically takes the better option each year.

[MilTaxEA]

Here is a quote from Pub 463:

Choosing the standard mileage rate. If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years, you can choose to use either the standard mileage rate or actual expenses.

[S T]

Glad that Koss Posted This

So I am going to "hijack" the thread and ask another question

T/p had a vehicle using Std Mileage sold to private party on 2/26/11 for $ 10,000, but then turned around and purchased a New Vehicle (replacement) on 2/26/11 - Not a Dealer Trade In.

Question - Do you show a Brand New purchase of New (start with New Purchase Price) and a Sale of Old (on 4797 which shows a loss)

Or, do you do a LKE as if a trade in?

Sandy

[Gretel]

Sandy, I don't see how this would qualify as like-kind since both transactions are unrelated other then tp needing another vehicle.

[MilTaxEA]

Not authoritative, but still a good summary on the IRS' website:

To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property.

Your client disposed of business property and purchased additional business property and needs to report it as such.

[S T]

Thanks, the same day transaction was what made me question LKE

Sandy

[AZ-Tax]

STD 1st yr, Actual 2nd with Sect 179 depreciation?

If you start with actual, then you are stuck with that forever. If you use standard for the first year, you can switch back and forth at whim in the future years. However, you will be stuck with straight-line depreciation when using actual expenses for any of those years. Most software I have seen has an "optimize" check box that automatically takes the better option each year.

So assume bus owner used STD mileage 1st yr of his business. 2nd yr bus owner wants to go Actual with same vehicle. Can bus owner elect Sect 179 on this same vehicle that he used STD mileage in 1st yr? I am guessing no thus he will need to use straight line depreciation. And yes, vehicle weight would qualify.