I have a new client 2012 is their first year with me. They sold an auto used for business about 40% average from 2010-2012. They bought the car in 2008 new for 26,000. Sold it in 2012 for 16,000. They didn't start using it for business until 1/1/2010. Kelly Blue book value today is 14,535. Their prior accountant didn't create a basis for the date placed in service. Any ideas on how to calculate the FMV at the date placed in service on 1/1/2010? I thought about using the value today (2/20/13) and averaging it with the cost at the date of purchase but this doesn't work because the minute you drive a new car out of the showroom it loses a large amount of value. The car is a Volvo.
-
-
I have an answer
and it is $20,906. I arrived at this using logarithmic laws of decay, so it is not a linear devaluation. I assumed purchase date was 06/30/08 and sale date was 06/30/12, and that could cause the number to be wrong.
However, if the taxpayer has consistently used the mileage rate for deductions, calculation of gain/loss may not even be necessary. That is because the mileage rate has the effect of depreciation "built in" to the rate. The portion of the rate attributable to depreciation is .22 in 2012, .22 in 2011, .23 in 2010, .21 in 2009, and .21 in 2008.
I always try to resist the temptation to use "actual" expenses, because in addition to the ease, you never have to worry about recapture of listed property if use falls below 50%. The big problem is getting the client to keep a log for business mileage, and you have to do that under either method. And you may continue to use the full mileage rate even if the rates above have fully depreciated the car with no penalty.
I assume you know how to calculate gain/loss, but just in case there is a good worksheet in TTB on page 10-2, and a very good "Did You Know" comment by the authors on page 10-5. -
Sounds good but backup
Actually the sale date was 3/11/12 and the purchase date was more like late 2007 - let's say December 1st. It would be great to have some backup for this. Do you have a worksheet or a basic formula? Also how does the logarithmic law of decay take into account the immediate huge decline in value when you leave the showroom with your new car purchase?? This sounds like it will work because the IRS usually just wants "a method" and they are happy. The logarithmic law of decay sounds like the kind of method they would go for. It would be great to have a calculation with the new dates.
Originally posted by Snaggletooth View PostComment
-
Through the garden
Here is how I arrived at the number, and there is no accounting for the immediate drop in value out of the showroom -- it is a "smooth" curve, and is not warped excessively downward on the front end. But the curve DOES drop quicker in early months. If IRS took issue with the calculation, I would just say, "Sir, I guess you're right...I will accept the government's calculation instead of our own." Putting the burden of the calculation on the auditor would probably end the issue on the spot.
I took the ratio of $14,535/$26,000 which is .5590. In other words the car was worth 55.90% of its original value. From the dates you give me, taxpayer owned the car 52 months. The formula is to take the 52nd iteration of a number under 1.0000 to find the rate of decay. That number to six digits is .988879 and if you have Excel you would enter .5590^(1/52). Your new focus number is now .988879 and this is the monthly multiplier, which used reiteravly 52 times would bring 1.000000 down to .559000.
Next, you would actually USE this multiplier to answer your question. From Dec 2007 to Jan 2010 is 26 months. Reverting back to Excel, this entry would be 26000*(.988879^26). Your answer, given the dates your gave me, would thus be $19,440.
A "linear" devaluation probably appeals more to the intuition, and would be the loss (26000-14535) = $11,465 divided by 52 months, or a loss of some $220.48 per month. 26 months of this uniform linear loss gives $5733, meaning the FMV would be $20,268. I feel the linear to be inferior because it ascribes the same loss in value to the last month as it does the first -- giving no bias toward your reference of the "showroom" loss. The logarithmic version gives a value almost $900 less than the linear, and this is reasonable.Comment
-
Rather than guessing 1. ask if he still has the original invoice. If he doesn't I am sure the dealer can provide him with a copy. To save time tell him to have the dealer fax it directly to you. If, for any reason, that doesn't work...the finance company can provide a copy, or Kelley bluebook could provide the new car value however, this may not include his options and wouldn't include dealer prep, sales tax, downpayment etc.Originally posted by Judy rocks View PostBelieve nothing you have not personally researched and verified.Comment
-
Kelley Blue Books used to be published every two months, and many libraries would get them. I don't know if they're still published in book form, but a call to your local library might be worthwhile. If you can't find the one you want at a library, try a local car dealership.Roland Slugg
"I do what I can."Comment
-
good idea
This is a good idea. I just emailed Kelly Blue Book about past years values. I'll post the reply when I get it.
Originally posted by Roland Slugg View PostComment
-
Try KKB.comComment
Comment