Donation of business vehicle

[Bird Legs]

Client is a Sole Proprietor. Has to do a lot of pickup & delivery of paper work.
Her daughter, over 25, is an employee and does a lot of the leg work.
Mother works out of home, legitimate office in home. Mother buys daughters vehicle.
purchase price is the balance owed on it to finance co. and the car, 1995 Ford Taurus,
is used exclusively by the daughter for the pickup & delivery of the paper work.
Purchase price of car $8900, purchased in April, 2004. Depreciation in 2004 & 2005 will
total approximatey $3,500. In October, 2005 Mother donates the car to Salvation Army
and they sell it for $500.
My client receives a 1098-C for $500. from the Salvation Army.
How much can my client deduct for a noncash contribution? The $500. sales price
or the remaining book balance of the vehicle, which is about $5400.?
Does this affect the Sched. C in any way?
Thanks for all your help all of you have given me over the years.
P S The car stayed at my clients house. Daughter came over there to pick up the
paper work that needed to be delivered. And she brought the car back to the home office after delivery & pickup.

[jainen]

You aren’t going to like my answer

You aren’t going to like my answer, so I recommend that you don’t read it. I mean, a lot of time I post unpopular answers, but you REALLY aren’t going to like this one.

First of all, I’m not going to insist that it was a sham transaction to recharacterize employee expenses as SE expenses (although that’s what happened). But I wouldn’t let her bump up the basis like that. Just because the daughter owed $8900 doesn’t make the FMV anywhere near that. Two years later it was only $500 and it was probably around $3500 when the mother took title (if it could be sold at all). Therefore the mother made a partial gift to the daughter, and needs to amend her 2004 return.

Even if $8900 were the correct basis, when you take listed property out of business use you must recapture accelerated depreciation. There’s the answer to your question about affecting Schedule C. Recapture anything over $850 for 2004 and limit 2005 to another $850, 5 year SL with half year convention.

As for the contribution, you can’t put it on Schedule C. That’s a personal deduction in the amount the car was actually sold for.

This bleak tax situation can not be blamed on the IRS. The problem was set up by the daughter’s decisions with the car dealer and finance company.

I said you wouldn’t like it.

[Bees Knees]

I'm not sure I would require an amended return on the part of the mother. The gift rules and related party transaction rules apply to below market sales and below market loans. You can't shift a loss over to a related party. The rules say nothing about paying more than FMV. If I pay too much to purchase business property, there are no rules that limit my depreciation deduction to FMV.

Having said that, I would agree that the only deduction allowed should be the $500 charitable donation. If you try to deduct the excess loss on Form 4797 as a business loss, then you could make an argument for the below market sale and related party loss rules to kick in.

[Bird Legs]

Thanks Guys

Appreciate your response. Of course, some responses may not be what I like to hear.
But, just like taking Castor Oil, the taste may be bitter, but the outcome is great.