SCH F Depreciation

[tsuewalker]

Client had a hay baler that burned in June 30, 2016 that started by a grass fire. When client bought the farm equipment, we lumped the tractor and all the accessories (including the baler) as one item to be depreciated. I'm trying to figure out how to back the baler out of the original purchase that we were depreciating and add a new baler that cost more they purchased after the fire destroyed the one included in the original purchase. The baler that burned was $15,400 by itself. He bought a new baler that was $33,800 of which they put the whole insurance check they received as a down payment to replace the one that burned up. Can anyone tell me what I need to do to get this right?

Thanks for your help in advance.

Tanya

[taxea]

This is the problem that happens when you don't take the time to enter each item separately. Lesson learned I hope. You will have to now, calculate the allocated amounts of cost and depreciation from the original entry and hopefully in the future will separate your depreciation items. As an example, I separate a computer from printer, monitor, speakers and any other hardware that applies. When one thing goes out of service, you only need to deal with that one item.

[Roland Slugg]

If I were in your shoes, I would ask the client to make a reasonable cost allocation for me, breaking down the original cost of the tractor and its components into individual costs for each. The allocation doesn't have to be perfect ... just reasonable. Then remove the baler and its depreciation from the books. If the baler wasn't yet fully depreciated, there will be a loss on its disposition.

[Gretel]

I agree but also was wondering if the insurance proceeds need to be allocated to lower the basis to zero, if applicable, first.

[RitaB]

Agree

Agree with everybody about everything, but I believe Tanya knows the original baler cost 15,400. You can figure things out accurately for this return knowing just that. If I knew the cost of the other items, I would sit down now and enter them individually so this is never an issue again. If I didn't know the cost of the other items, I'd find out.

[tsuewalker]

SCH F Depreciation

If I understand everything everyone is saying is to back out the depreciation worksheet that shows the total amount of original tractor with all the accessories, and then enter them separately on their own worksheets and figure out past and current depreciation on each one separately! Am I correct? Then I can back out the baler and figure out if there is a loss and then I will add the new baler by itself. Then I will have each item, tractor and all of its accessories listed separately, in case something ever happens like this again.

Yes, I learned my lesson. When first purchased, I was only shown a sheet with total amount on it for everything. Next time, I will know to ask for each item separately!

Thanks for your help in advance

Tanya

[Roland Slugg]

Tanya, you realize, I assume, that what you have described was an "involuntary conversion." That fact was not relevant until you mentioned in a later post that there was an insurance recovery. Had there been no insurance recovery, the remaining basis in the baler, if any, would simply have been a deductible loss. If there is an insurance recovery, however, then the Code §1033 rules come into play.

I'd like to offer three additional points about this issue:

Yes, it's a good idea to list each asset separately on a business's depreciation schedule for the reasons others have explained and that you have also acknowledged. Nevertheless, when one component in a multi-item asset is retired, such as your farmer's baler, it shouldn't be too difficult to separate the components so you can deal with one specific item. If you can get a reasonable cost breakdown from your client, you don't need to recalculate depreciation for each component on a year-by-year basis. Just make the breakdown "as of" the start of the current year, i.e. 2016, and split the accumulated depreciation proportionately among the various components. You can probably do it in ten minutes.

When there is an involuntary conversion, and new, similar property is acquired to replace it, the tax mechanics are essentially the same as in a §1031 exchange. For depreciation purposes, the "default" rules require a "split basis." However, the taxpayer can elect, if he wishes, to combine the remaining basis of the old asset and the additional basis of the new/replacement asset, and depreciate the total as one asset starting on the replacement date. (Regs §1.168(i)-6(i))

Finally, in order to avoid having recognized gain, the replacement property acquired in a §1033 conversion must cost at least as much as the insurance proceeds received for the loss of the old equipment.