traded in fully depreciated equipment

[oceanlovin'ea]

Client traded a lawn mower for 2 blowers from a dealer. (He has a lawn service business). He bought the mower in 2008 and I took section 179. A couple of months ago he traded the mower in for 2 blowers. ( I know tax return doesn't have to be done yet, but I am doing the bookkeeping transaction).

I haven't had a trade in transaction in a very long time so did some research. Just using round figures he paid $1000 for mower. He was given a trade in allowance of $350. The blowers cost $750, leaving him with a balance to pay of $400.

On Intuit website, a question was posed similar to this. The answer given was that he had a $350 gain on sale of asset. It said to take old equipment out of assets by crediting asset account and debiting accumulated depreciation. Then the new equipment would be entered in at the original cost of the new equipment.

On another website, ruraltax.org, it is looking at it from tax return standpoint. By filing out Form 8824, the gain is actually rolled over to the new equipment and the new equipment would be put on the books at the amount actually paid or $400.00. In this case, you would still take the old equipment out of asset and accumulated depreciation accounts as he no longer owns them.

Which is the correct way to do this? Bottom line is that the first one gives him a gain that has to be reported on his tax return. But the second one simply would have a lower expense and probably the bottom line would be the same.

Any thoughts?

Thanks.

Linda, EA

[Uncle Sam]

Traded-in Fully depreciated equipment

Like Kind Exchange Form 8824 doesn't really apply here.
It's no different than a trade-in/new purchase of an automobile.

The fully depreciated old asset trade-in reduces the cost of the new asset.
So the $ 750 cost reduced by the $ 350 trade-in reduces the depreciable cost
of the new asset to $ 400. So long as the exchange took place simultaneously and
not as 2 separate transactions.

If it were 2 separate transactions where the old asset was turned in separately and
he got $ 350, then in a separate transaction purchased the new blower - THEN you'd
have a $ 350 gain, with a $ 750 cost of new blower.

[Davc]

Assuming the equipment is in the same class 8824 does apply, just like it does for the trade in of a business auto for a new one.

[Gary2]

I had to think about this a bit.

On the one hand, I think that Uncle Sam is right that auto trade-ins are frequently handled without an 8824.

On the other hand, I can't find anything to justify that. The closest I came was an assertion, without citation, that if you made the appropriate election to track the depreciation as a single item (1.168-6(i)), then the 8824 wasn't required. The 2106 instructions can be read as implying that, but they don't explicitly say so, and, of course, that only applies to employees.

The only other item I saw was a TIGTA report that takes the IRS to task for not getting the 8824 when they need it.

So I don't know what the right answer is, or maybe the best answer happens to be a wink-wink-nudge-nudge answer. But I believe you get the same income and basis results as Uncle Sam stated with or without the 8824.

[Gene V]

Trade-in

TTB shows two option on Auto Trade-In-rules
Option 1 is to use Form 8824, if taxpayer elect to treat the transaction as a tax-free disposition of the old car (this
should apply to equipment also).

See TTB page 10-8

[oceanlovin'ea]

no auto

Remember this is not an automobile. This is lawn equipment and part of a lawn service business. The example I mentioned from ruraltax.org was for a farm and it was an expensive piece of equipment. This business doesn't fit into that category of being a farm business. It is just a service business, an S corporation. So maybe the 8824 isn't needed.

I still think my main question is concerning how I treat the purchase of the new equipment. I ended up putting the new equipment in at the price he actually paid for it. If I put it in at the actual cost, then I will have to report gain on the disposition of the old mower. I was trying to look down the road and see which is going to be the most efficient way to handle the transaction.

Thanks.

Linda, EA

[Gary2]

Remember this is not an automobile. This is lawn equipment and part of a lawn service business. The example I mentioned from ruraltax.org was for a farm and it was an expensive piece of equipment. This business doesn't fit into that category of being a farm business. It is just a service business, an S corporation. So maybe the 8824 isn't needed.

I still think my main question is concerning how I treat the purchase of the new equipment. I ended up putting the new equipment in at the price he actually paid for it. If I put it in at the actual cost, then I will have to report gain on the disposition of the old mower. I was trying to look down the road and see which is going to be the most efficient way to handle the transaction.

I don't think the nature of the business affects the requirement or non-requirement of the 8824.

Keep in mind that the underlying rule about like-kind exchanges is not optional, so you can't report gain on the old mower. The only general choice is whether to depreciate under the default rule as two items or to elect to depreciate as one item. In your case, the original is fully depreciated, so you wind up with just one depreciation item either way, with the same basis either way. Filing the 8824 won't change the math nor any future depreciation or basis.

The only real question is whether or not the 8824 is required.

[oceanlovin'ea]

the time has come

Ok. The time has come to do this tax return. So I am bringing this back up again.

Do I need to do the 8824?

I took the old mower out of the asset and accumulated depreciation accounts. I entered the new blowers at the amount he actually paid.

Thanks for the help. I really appreciate it.

Linda, EA