S-Corp - LKE Question

[peggysioux]

Taxpayer purchased a piece of equipment in 2003 for $30,340 and 179'd the total amount leaving a basis of zero. In 2005, taxpayer traded in that piece of equipment for equipment at FMV of $18,699. He was given $13,000 for his trade-in. I know that the taxpayer's adjusted basis for new equipment is $5,699 and he has a realized gain of $13,000. My question is how does the realized gain get posted in the S-Corp's books? If I set up the new asset at $18,699 (the adjusted basis of $5699 and the realized gain of $13000), then how do I make the adjustment showing the depreciation value of the vehicle is $5699 and not the $18,699??? Or am I totally incorrect in my thought process?? Hopefully, I am explaining my question clearly enough for you to understand.

[Snaggletoof]

Peggy Sue

...(with apologies to Buddy Holly)...

Peggy, at the risk of sounding abrupt, I think you are wrong in your thought process.

There is no gain for tax purposes, and as I read, I think that is your question. You may have been derailed by companies who keep book depreciation separate from tax depreciation, and have a book-to-tax differential. There may be several debit-and-credit type recognitions if this is the case.

However there is no gain for tax purposes. If you want to approach it by taking a thought perspective, you may consider that over the future depreciable life, there will be considerably less expense by depreciating only $5699 instead of the much higher $18699 true value of the equipment. Approaching it this way, the perceived "gain" of $13,000 is thus recovered over the future life of the equipment.

[OldJack]

Taxpayer purchased a piece of equipment in 2003 for $30,340 and 179'd the total amount leaving a basis of zero. In 2005, taxpayer traded in that piece of equipment for equipment at FMV of $18,699. He was given $13,000 for his trade-in. I know that the taxpayer's adjusted basis for new equipment is $5,699 and he has a realized gain of $13,000. My question is how does the realized gain get posted in the S-Corp's books? If I set up the new asset at $18,699 (the adjusted basis of $5699 and the realized gain of $13000), then how do I make the adjustment showing the depreciation value of the vehicle is $5699 and not the $18,699??? Or am I totally incorrect in my thought process?? Hopefully, I am explaining my question clearly enough for you to understand.

There are 2 ways to handle this on your tax depreciation schedule. The old way and the new way, both are acceptable with the IRS. Personally, I prefer the old way.

The Old Way:
1. Remove the traded asset from the tax schedule. Remove the traded asset from the books asset and accumulated depreciation with the net-book-value, if any added back to the asset account as part of the cost of the new asset.
2. Add the (cash/loan) net amount paid ($5699) for the new asset to the net-book-value (zero) to the old asset.
3. Add the new asset on the tax schedule with the amount of item 2 for depreciation (exception- net-book-value of old asset, if any, does not qualify for §179).

The New Way:
4. Leave the old asset on the tax schedule as it is and continue to depreciate it as though you still owned it. No book entry required but could be the same as item 1 above.
5. Add the new asset to the tax schedule in the amount of (cash/loan) actual net cost and depreciate it under current rules at date of purchase.

[peggysioux]

My question

was more regarding the books of the S-Corp and not the tax purpose. Tax return shows new asset with a basis of $5,699 and that is the amount I had carried over to the books; however, in my research, I found some documentation that said "if you have a gain (had a realized gain of $13,000), the gain is deferred by rolling the gain into the book value of the new asset. I am confused with the rolling of the $13,000 into the book asset. If I do that my book value shows a basis of $18,699, but I am only able to depreciate $5,699 over the depreciation life. Thank you for your help!!!!

Peg

[OldJack]

was more regarding the books of the S-Corp and not the tax purpose. Tax return shows new asset with a basis of $5,699 and that is the amount I had carried over to the books; however, in my research, I found some documentation that said "if you have a gain (had a realized gain of $13,000), the gain is deferred by rolling the gain into the book value of the new asset. I am confused with the rolling of the $13,000 into the book asset. If I do that my book value shows a basis of $18,699, but I am only able to depreciate $5,699 over the depreciation life. Thank you for your help!!!!

Peg

There was no realized gain of $13,000. Always remember that when it comes to the invoice/bill of sale of a vehicle, you ignore the trade-in value on the dealers paperwork as that number and the sale number are fudge numbers to make the buyer happy.

The normal entries you would make/see on the books would be:
1.---
$30,340 debit accumulated depr-equipment
$30,340 credit equipment cost- asset account
$0 debit or credit the equipment cost asset account for net book value (trade) or gain/loss P&L account (if actual sale).

To remove old equipment traded for new equipment and recognize any gain/loss on disposition (zero).

2.---
$5,699 credit to cash for purchase of new equipment
$5,699 debit equipment cost- assets account

[peggysioux]

Thanks Old Jack

The 8824 LKE form computed a realized gain of $13,000 and when I found the documentation stating I needed to reflect the realized gain in books is when I became confused, as I had already set up the asset in the books at the basis of $5,699 - didn't know how to make adjustments. So I should just base everything on the $5,699 basis, correct??

Thanks!!!!!!!

Peg

[OldJack]

So I should just base everything on the $5,699 basis, correct??

True, but be sure, if you have not already, to remove the old asset cost and accumulated depreciation from the books or both of those accounts would be overstated even though the net would be the same.

[peggysioux]

Old Jack,

Thank you for being patient with my lack of knowledge; your input is truly appreciated.

Peg