Bussiness auto trade-in rules

[HJSTAXSTOP]

I am still confused on this. Page 10-9, TTB, Method # 1 election. Is depreciation normally recaptured being deferred gain? I see no mention of this in the example. If you took a Sec. 179 in an earlier year and traded up this year, can this be deferred using this method ? Thanks, HJ

[OldJack]

Don't make it difficult. Assuming this is a business asset, depreciate the trade-in (old) for a half year and determine the net book value (cost-accum depr) and add the net book value to the the cash or financed cost of the new asset. This is your depreciation basis for the new asset except for §179 write-off. Code §179 value is only the cash or financed cost of the new asset and not the basis that includes the net book value of the old asset. Deferred gain is something you do not have to deal with and no recapture of anything is required. Although a trade-in is a code §1031 like-kind exchange I don't bother reporting it on the form 8824 as it is a time consuming and useless form for a vehicle trade-in.

On the other hand if this is a personal owned asset used for business and personal you have the split of personal verses business issue to deal with and should use the worksheet in the tax pub.

[Bees Knees]

I am still confused on this. Page 10-9, TTB, Method # 1 election. Is depreciation normally recaptured being deferred gain? I see no mention of this in the example. If you took a Sec. 179 in an earlier year and traded up this year, can this be deferred using this method ? Thanks, HJ

Yes, the depreciation is being deferred in the example. The adjusted basis is reduced by depreciation claimed, and no tax is being paid in the year of trade. The only thing you are doing in the example is figuring how much of the basis you can use for depreciation purposes on the new vehicle. That calculation does not change the adjusted basis of the vehicle for sales or exchange purposes. It is only a calculation for depreciation purposes. Step 5 says basis for sales and exchange purposes is $15,116 (The $5,316 adjusted basis of the old vehicle after depreciation allowed plus $9,800 boot for the new vehicle). But for depreciation purposes of the new vehicle only, the basis is $11,722. The difference is so that you don't wind up depreciating any of the basis of the old vehicle that was previously used for personal purposes.

Use the worksheet on page 10-2 to do the calculations.

[HJSTAXSTOP]

Thanks

I bet Quickfinders really miss you guys. I began with QF in '97 or before but jumped ship as soon as I got the ad of TTB and my hunch has paid off. I think it is good people who make a good product, and sometimes the product is too good and are gobbled up by the Biggies. I would like a comment on tax software, if you have a preference for a small in-home part time business. I started with TAXSHOP , back in '92. It was a good DOS base program, But they grew and sold out to DRAKE, which is a good program, but out of my price range. Then ATX, which is ok, but it's know ATX/KLEINROCK., so on it goes. But, to you guys- A big thanks, HJ

[Chief]

Software Comment

I am a part time, home run business, and I would recommend to you TaxSlayer Pro. They have special pricing through May. Contact Gina Purkey

Gina@TaxSlayerPro.com


Have used them for three years. All inclusive at low cost.

[Bees Knees]

I use ProSeries, for no other reason other than I started with Mac-In-Tax back in 1988, which was then purchased by somebody (forget name), which was then purchased by Turbo Tax, which was then purchased by Intuit who started the ProSeries line. ProSeries sent us a letter in 1994 or 1995 saying their customers who use the Mac represented only 5% of their total customer base, so I had to switch to PCs around then. I think ProSeries does the job just fine. For about $1,600, I get unlimited Federal, One State (MN), and e-filing. I do pay-per return for all business and fiduciary returns, since I only have a handful of those.

[HJSTAXSTOP]

Same boat, smaller ocean

Thanks Guys, I'll check it out. I have potatoes and onions up, corn, beans, squash, etc, in and am about to call it quits for this year and turn to my first love. Hope you all have a good season off. ( If thats the case). Hope to hear you next year. HJ

[S T]

Help

Well I think I am in a very "taxing" situation.

Schedule C client had a trade in of vehicles in June 2003. Did the trade and split into the old and the new, so carrying two different depreciation lines under the 280F rules, what a nightmare!

Also in 2003 took the special allowance that was allowed, after asking the client whether or not they were going to keep the vehicle for at least 5 years. Well we all know what that answer was! Of Course.

Well here I am in 7/2006 and guess what the client traded the vehicle for a new vehicle.

I am having a problem in discerning what the clients adjusted basis is in the vehicle purchased in 6/03, but have diligently gone back to try to discern what depreciation was taken due to the splits under 280F rules.

Question: what do I do with the special allowance taken of $15,000+ and early disposition of the vehicle now in 7/06?

Do you still consider it a LKE and do the 8824 and just reduce basis by the special allowance, or do we have to recalculate for the 8824 form and then recapture part of the Special Allowance.

I am just so confused right now!

Basis on the LKE exchange in 2003 is $44,703, Special allowance taken is $15, 428 (based on the 280F rules), normal depreciation taken through 2005 not including half year for 2006 is $14,985. So basis not including 2006 half year convention is $ 14,920, assuming 100%. Trade in allowance shows $13,000 with amount of liability as $19, 063 so they are negative. Cash down $5,000, amount financed on new vehicle is $67,930 (negative on old loan was added to new loan).

Can someone help me out here and advise how to report what on what schedules.

thanks,

Sandy

PS I am not doing these splits anymore, making the election to report as as disposition per TB 10-9

[Roland Slugg]

I am not doing these splits anymore, making the election to report as a disposition per TB 10-9

I don't have the benefit of a TB, so I can't look at your reference to TB 10-9. Does it say that a TP can elect to report gain on a LKE? He can not.

What he can do is elect to apply the "old" rules and add the basis of the old vehicle to the new, added basis of the new vehicle, instead of continuing to depreciate it separately as if the old vehicle were still owned. If this is done, a statement needs to be added to F-4562. See Regs §1.168(i)-6T(i) and (j).

If I have misunderstood your point, perhaps someone else will post a more on-point reply, or you may post a clarification.

[veritas]

Have we discussed a trade in before of a depreciable asset that Sec 179 was taken on? Can it be deferred in a tax free exchange?

[S T]

TB page 10-9

Roland, thanks for your post,
Here is the info on TB page 10-9 No it is not addressing as a LKE, that is my dilemna on treatment, I don't know how to!

If a car is traded in on another car after Feb 27, 2004, the taxpayer has two different ways to treat the transaction.

1) The taxpayer can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. The old car is treated as disposed of at the time of the trade-in. The depreciable basis of the new car is the adjusted basis of the old car, figured as if 100% of the car's use had been for business purposes, plus any additional amount paid for the new car. The depreciation, deduction is then figured for the new car beginning with the date it is placed in service.
2) If the election described in (1) above is not made, depreciation must be figured separately for the remaining basis of the old car and for any additional amount paid for the new car. Two separate depreciation limits are applied. The limit that applies to the remaining bais of the old car generally in the amount that would have been allowed had the taxpayer not traded in the old car. The limit that applies to the additional amount paid for the new car generally is the limit that applies ofr the tax year, reduced by the depreciation allowance for the remaining baisis of the old car.

If a car is traded before Feb 28, 2004, the taxpayer can use either method, or any reasonable, consistent method of figuering depreciation. For rules on how to use method #2, above, see IRS Pub 946. the rest of this sub-heading is devoted to the rules under method #1 above.

Method #1 election. To use the simplified method under #1 above, the taxpayer must make an election on a timely filed tax return, including extensions. Self employed taxpayers enter at the top of form 4562. "Election made under Section 1.168(i)-6T(i)" Employees use Section D, Part II of Form 2106. The application of this regulation expires Feb 26, 2007.

then examples, and author's comment about example

First question, since it has arisen 2 times this week for me , if we exercise #1, then do we still treat it as a LKE and complete 8824, then, what I am not understanding is how to treat the Special Allowance Deduction that was taken when the trade in (lke) was done in 6/03 and how to arrive at the new basis for the new vehcile in 7/06 and whether or not there is a recapture that has to be reported.

Do I treat the Old vehicle in 6/03 as a sale and not address the trade in and recapture a portion of the Special Allowance,

or do I keep moving all adjusted basis into the new vehicle with LKE and arriving at new basis for depreciation.

Or do I do LKE on the trade in (with what adjusted basis) and also recapture a portion of the Special Allowance??

We all knew that this Special Allowance would probably come back and "haunt" us particularly on vehicles.

Does this help you in the reference to TB 10-9?

Examples with the posted figures would be wonderful!

Thanks

Sandy

[S T]

My Question

I know Veritas, thanks for posting!

I have reviewed old posts, I have researched TB and prior QFand Googled, I have tried to calc in CFS Tax Tools, and even tried to make a "dummy entry" in my 2005 tax program, but I can't seem to figure out how to handle the transaction. Guess I need the examples instead of words and code sections.

I know Old Jack will jump in here soon and say "don't make such a big deal" of it, and make it simple.

I know some practitioners do not handle a trade of autos on 8824, I almost always do, even in 2003 with the 280 F rules, and now that seems to have created a nightmare for accounting and taxes.

So now I have those rules in 2003, but the Special Allowance to deal with and I simply can not understand it!

Thanks in advance for clearing this matter up and I am sure making it simple!

Sandy

[Unregistered]

Since 179 is recaptured when business use fall below 50% and an exchange withdraws the asset 100% then 179 in excess of Macrs allowable depreciation would be recaptured even in an exchange. Or am I mistaken? I'd like to be mistaken.

[Roland Slugg]

I'd be confused too

Dear Sandy

No wonder you're confused. The first part of that quote from TB 10-9 is poorly written and seems to suggest that a taxpayer has a choice of treating the LKE as a sale of the old vehicle ... taxable ... and a purchase of a new vehicle. That's not at all what the Regs I cited are all about.

Please read my post again, and be sure to refer to the Regs I cited. They're easy to read and understand. In a nutshell §1.168(i)-6T(i) just says that a taxpayer can elect to add the remaining basis of the old asset to the additional basis of the new asset and depreciate the total as one asset ... the newly acquired one. This is the way it was always done prior to IRS Notice 2000-4, as later modified by these Regs. Regs §1.168(i)-6T(j) explains how to make the election. This very same information might even be included in the instructions for F-4562 by now ... haven't looked recently.

There is no depreciation recapture, whether ordinary, §179, or "Special Allowance" on a LKE, except in certain cases where the relinquished property was owned for less than one year. The replacement property even qualifies for an additional §179 deduction, but only on the additional sum paid ... not the carryover basis.

[S T]

So

Roland,

Please excuse my belaboring the point, but maybe some others will also benefit from this post.

Actually that is my point, the reference in TB does address the LKE (or trade of vehicles) but does not address the handling of Sect 179 or Special Allowance.

So are you saying I totally disregard any recapture on the Special Allowance. Just take my adjusted basis including the Special Allowance and transfer into the LKE (trade in).

If that is the case of course the t/p is not going to be happy as the basis will be really low.

I could be very close to have a negative (loss) after I apply the trade in and applying the 2006 half year convention. Does that enter into the picture at all on a trade in and completing the 8824 form? I thought I could not have a negative. In which case how do you handle that. Treat like a sale show the negative on the sale and then do a recapture on the Special Allowance since the t/p didn't hold the property for 5 years??

So based on what I posted earlier my basis in the new vehicle is???

Thanks,

Sandy