Section 179 on business truck--then goes out of business

[origun]

Taxpayer was self-employed in construction in 2016 and bought a $8500 truck (over 6000 lb. so no 280F limitations) which (according to him!) was used 100% in business all year. He elected to use Section 179 for entire $8500 cost in spite of tax preparer warnings! Now for 2017 return, he is out of the business and works as an employee. I am waiting to hear from him as to disposal of truck but I'm assuming it was converted to personal use.

My thoughts are that he has to recapture all except the allowable straight line depreciation (10% or $850) on a 4797 and carry to a Schedule C and also pay SE tax. Not a good situation! Any thoughts to make things a bit better?

If he did sell it in 2017, let's say for $4000, do we not do recapture and instead figure capital gain with a basis of $0 and l/t gain of $4000?

[ATSMAN]

Taxpayer was self-employed in construction in 2016 and bought a $8500 truck (over 6000 lb. so no 280F limitations) which (according to him!) was used 100% in business all year. He elected to use Section 179 for entire $8500 cost in spite of tax preparer warnings! Now for 2017 return, he is out of the business and works as an employee. I am waiting to hear from him as to disposal of truck but I'm assuming it was converted to personal use.

My thoughts are that he has to recapture all except the allowable straight line depreciation (10% or $850) on a 4797 and carry to a Schedule C and also pay SE tax. Not a good situation! Any thoughts to make things a bit better?

If he did sell it in 2017, let's say for $4000, do we not do recapture and instead figure capital gain with a basis of $0 and l/t gain of $4000?

That is my understanding as well if he sells it the basis is 0, so the full proceeds of of the sale are gains. Your software should be able to do the correct tax treatment. I have done quite a few of these types of situations over the years and inputting the correct date of sale, sale proceeds etc. lets the software do the correct calculation and put in in the correct lines of the forms. What software do you use?

[origun]

No sale...just recapture

Thanks, Atsman, for the reply. I use Intuit's Tax Pro Connect Online as I have a very small business and don't want to buy expensive software; working "in the cloud" and paying by the return works for me.

I just heard back from the client and he still has the truck so no sale, just recapture. Am I correct that I can only use 10% (half of one year using straight line) for last year and count the rest (90%) as "Other Income" on Schedule C? Client won't be a happy camper!

[Kram BergGold]

Correct

Maybe he has some expenses like home office for a few months to help offset the recapture.

[JON]

Is it not recaptured to the extent of the "fair market value" when it is moved out of business to personal?

[origun]

FMV used when recaptururing 179

Jon, that is something I'm not aware of. (Thanks for the idea--I'm kind of grasping at straws trying to find some way to help the young man with a growing family.) Does anyone have a reference for that? I have assumed I had to recapture everything between the 179 am't ($8500) and the amount of SL depreciation for half a year using half-year convention that would have been allowed ($850)...which I'm sure is a lot more than FMV. He still has the vehicle but I would guess it is an old clunker not worth $7650! I could get specific info about truck to try to determine FMV if it would help.

[AZUKHiker]

Is it gain

That is my understanding as well if he sells it the basis is 0, so the full proceeds of of the sale are gains. Your software should be able to do the correct tax treatment. I have done quite a few of these types of situations over the years and inputting the correct date of sale, sale proceeds etc. lets the software do the correct calculation and put in in the correct lines of the forms. What software do you use?

I thought s179 is included in deprecation recapture on a disposal. So if they sell, basis is 0 and all the proceeds up to original basis is ordinary income as depreciation recapture, not gains.

[ATSMAN]

I thought s179 is included in deprecation recapture on a disposal. So if they sell, basis is 0 and all the proceeds up to original basis is ordinary income as depreciation recapture, not gains.

I loosely used the term "gains". It is ordinary income because Sec 179 reduced ordinary income. As I said the software should be able to plug the figure in the correct place!

[origun]

Not sold

Vehicle has not been sold;it was converted to personal use. So...is there any disagreement with this treatment:

Must recapture excess depreciation in 2017. The recapture amount goes on Schedule C, Other Income, line 6. (I can compute and get it there!) So...ordinary income and SE tax!

Basis now goes up from zero to amount of recapture...if sold in the future or put back into business use.

Does anyone else have any input on Jon's comment: "Is it not recaptured to the extent of the "fair market value" when it is moved out of business to personal?"