sold equipment after sect 179 expense question

[nwtaxlady]

I have a new client. Had him bring in 2009 thru 2014 tax returns and I am preparing the 2015 return.

On 2014 return & only on that return, he had a small construction business which he found out he could no longer do since he didn't have the proper licensing in his state. So on that Sch C return (2014) he had purchased a $13,000 Manlift and prior preparer took section 179 expense of $5,600 and depreciated the rest over 7 yrs SL. Looks like took Sec 179 just enough so he wouldn't have to pay any SE tax...that's what it looks like to me. I asked this client if he knew about this and pointed it out on his tax return and he knew nothing about it.

Beginning of 2015 due to few deaths in family and personal health issues, he closed that business. He put the Manlift on craigslist and only got $5,000 for it.
Now how do I handle this on the 2015 return? He does not have a Sch C for 2015. Having taken that much depreciation on that piece of equipment just doesn't seem right.

How is this handled on the 2015 return?
Thank You!!

[TaxGuyBill]

First, you need to know EXACTLY when the business closed.

If it was in 2014, then depreciation (and section 179) was not allowed at all because it was "place in service" and taken out of service in the same calendar year. The 2014 tax return would need to be amended.

If it was in 2015, then there WILL be a Schedule C, reporting the recapture of Section 179 (based on Part IV of Form 4797).

[Nashville]

Disagree

Disagree with the TaxGuy on this one.

It does sound that the business closed effectively in 2015, but if this is not the case, Bill is right. S. 179 should not have been taken, and 2014 should be amended. Otherwise, however, the prior tax strategy of taking "just enough" to avoid SE tax is certainly an allowable election. He couldn't take more than his profit anyway without rolling forward the s.179 expense.

The equipment is considered investment on 4797 and not operational as in Sch C. First measure whether there was a gain or not, and prior depreciation must be factored in this measurement. If the equipment was more than a year old when sold and the sale was a gain, the transaction would be reported on 4797 Part III, or if a loss on Part I. If held less than one year, regardless of gain or loss, report on Part II.

If there were no other business transactions other than the sale, no need to file Sch C.

[Roland Slugg]

Having taken that much depreciation on that piece of equipment just doesn't seem right.

Why doesn't it seem right? He paid $13,000 for the equipment and sold it the following year for $5,000 ... $8,000 less than its cost. So his deductions in 2014 and 2015 should come to that amount ... $8,000.

Based on the information you furnished, his §179 deduction was $5,600, and since he elected the straight-line method, the "regular" depreciation on that same piece of equipment should have been an additional $529 in 2014. If he did not operate the business at all in 2015, then there would be no depreciation for that year, as the equipment was removed from service early in the year. Thus, his basis in the Manlift when he sold it was about $6,871. He sold it for $5,000, so there was a loss in the sale of $1,871. If he actually did use the Manlift in his business in 2015, even for a short time, then he could take a half year's depreciation on it that year ... another $528 or $529. If he does that, the depreciation would go on Schedule C. That 2015 depreciation, if taken, would, of course, lower the basis by an equal amount, to about $6,342, and that would reduce the loss on the item's sale to $1,342. You can see that the overall deduction in 2015 will the same either way ... either a loss of $1,871, or depreciation of $529 plus a loss of $1,342. Mox nix.

In any case, the equipment's sale should be reported on F-4797, either in Part I or Part II, depending on whether it was used in his business for more than or less than one year. That one-year measurement is based on how long the equipment was used in the business, not how long he actually owned it. The resulting loss will be an ordinary loss, not a capital loss.

Finally, I wish to comment on points made in another reply. You said the owner closed the business early in 2015 ... "beginning of 2015" were your exact words. Assuming that was, indeed, the case, then the equipment was not placed in service and removed from service in the same year, and no amended return or other correction to the 2014 depreciation is necessary. Regarding a recapture of the §179 deduction, that is not necessary, either. Recapture of a prior year's §179 deduction is only required when an asset's "business use" drops from above 50% to below 50%. That is not what happened in your client's case. The Manlift was always a 100% business-use asset. It's really a moot point anyway, because even if all or some of the §179 deduction had to be recaptured, the asset's basis would simply be increased by the recaptured amount, and that in turn would increase its basis and result in a greater loss on its sale. No net difference.

[TaxGuyBill]

I stand corrected. I forgot that §179 recapture does not apply if the property was sold.

https://www.irs.gov/publications/p946/ch02.html#en_US_2013_publink1000107452

[nwtaxlady]

Thanks for clarifying all of this for me!

Thanks TaxGuyBill and Roland Slugg. You explained it well and that's what I needed to make it clear in my mind.

He did close the business beginning of the year. No income and closed up shop in January. Put the Man lift on craigslist and sold it.

What irritates me is when tax practitioners do not give a depreciation schedule in the client copy. No where do I see when this was placed in service. There is a form 4562 with the Manlift section 179 expense at the top Part I and then below the remaining for SL 7 yr HY . There is NO dates. NOW WHAT?

[Burke]

It wasn't that long ago. The client should be able to get the information for you either by a sales receipt, cancelled check, credit card record, or store records, etc. How did the preparer know how much it cost? He should have the date in his software for 2014, to calculate the SL 7-yr HY. Have the client ask him for the worksheet. The backup documentation should have been in the client's copy of his tax return for the purchase. $13,000 is a lot of money to pay in cash.......

[Golden Rocket]

Avoid this problem

On listed property, I try to avoid this problem by refusing to take s.179 on ANY listed property.

Only property which can double-up as personal use is listed property to begin with. Usually this means automobiles, computers, a few other things. On automobiles, resist the client's urge to use actual instead of mileage, and you won't have recapture to begin with. It's even worse with computers because they can go from 100% business use to 0% use in practically no time. What's worse, they never get sold...more likely than not they become obsolete junk. Limit them to 200% DB and you don't have recapture.

Odds of making a "listed property" purchase and claim it's use will remain over 50% for the duration of its life is slim and none.