Depreciation of leased property

[ChEAr$]

Question came up about depreciation of leased property.

Background; client bought a truck for son in law to drive. Truck titled in client's name.
Son goes to another tax person who depreciated the truck for son who drove it, paid all
expenses, took in all the income. Client's only involvement is that truck is in his name, and
of course the annual federal tax form bears client's name.

Hmmm, I thought one had to own to depreciate. So here on page 9-12 of The TaxBook
I read that "leased property is depreciable only if taxpayer retains incidents
of ownership.....includes legal title, obligaton to pay for property, maintenance and operating
expenses, responsibility for taxes, and risk of loss if property is destroyed/damaged."

Seems to me that son in law can walk away any time, both from the truck (and his wife!)

Now client wants to buy new truck and his lawyer suggested LLC and now client has asked me about it (unlike last time).

I'm trying to explains that if he (LLC) buys truck, the LLC will then lease it to son in law,
collect lease payments, pay off the truck and the LLC will be the one to take depreciation.

Comments anyone?

[sandysea]

The only way the son can depreciate the truck if it is purchased by the LLC for him to use would be to have a capital lease of the vehicle. The first vehicle sounded much like a "gift" to the son, but if they are taking it back to use it as a down payment on a new truck, then essentially the son did not have the right to depreciate it, but your client would have also had to pick up income for the amounts the son took as expenses or some sort of rent or lease as it were....

Why put a new truck in an LLC...is it just for holding the title to the truck or is there other activity going on?

[ChEAr$]

Just as I thought

The only way the son can depreciate the truck if it is purchased by the LLC for him to use would be to have a capital lease of the vehicle. The first vehicle sounded much like a "gift" to the son, but if they are taking it back to use it as a down payment on a new truck, then essentially the son did not have the right to depreciate it, but your client would have also had to pick up income for the amounts the son took as expenses or some sort of rent or lease as it were....

I agree with all you say. And of course there was no capital lease. Not sure about
disposition of first truck. But actually that was three years ago and I'm going ot leave
that alone.

[/QUOTE]Why put a new truck in an LLC...is it just for holding the title to the truck or is there other activity going on?[/QUOTE]

Why? (grin) Because client's lawyer so advised. (another grin)

I've explained to client that his LLC will hold title to truck, that his son in law needs to
make payments to the LLC (probably for amount of note payment), and that the LLC
will be the one to claim depreciation.

Or at least I hope i have and he understands it.

[Bird Legs]

Question

How is client reporting the lease income? On Sched. C? E.?
My age has caught up and overtaken my brain, but I thought it would depend on how
client is reporting to IRS. Did the taxpayer elect to file with IRS as C Corp. S Corp.
Did not realize that the title to a vehicle could be in the name of LLC.

[jainen]

a capital asset

>>his son in law needs to make payments to the LLC (probably for amount of note payment), and that the LLC will be the one to claim depreciation.<<

If he only paid the note amount, the LLC would have expense equal to income. There is no profit motive in that, so the LLC would not be a trade or business and the truck would not be a depreciable Section 1245 business asset. In that case the basis could only be recovered on disposition as a capital asset.