Depreciate less than purchase price?

[KarenMM]

I have a client who purchased a van for his business in 2007. He wants me to depreciate about 2/3 of it instead of the total, so that when he sells it in 7-10 years, he will not have any business gain on it. Is this okay? He will legitimately use it in his business during the time he owns it.

[BOB W]

I have a client who purchased a van for his business in 2007. He wants me to depreciate about 2/3 of it instead of the total, so that when he sells it in 7-10 years, he will not have any business gain on it. Is this okay? He will legitimately use it in his business during the time he owns it.

Hum.... I guess you could us Straightline depreciation with a reserve of 1/3 and stretch the 2/3 out over 7 years. I'm not sure where "Allowed or Allowable" fits into this calculation.

[thomtax]

Of course you can always set up, as was mentioned, a value (call it salvage or whatever) for a certain amount, since it may still have some value after depreciation period. IMO, otherwise, the allowable depreciation might get you.

LT

[veritas]

What happened to

allowed or allowable?

Explain to your client that when they sell they are just recapturing a portion of what you have previously deducted. If your client is a sole proprietor then the depreciation will lower self-employment tax which is not recaptured when the van is sold.

[taxstudent]

Unless you elect out of MACRS under section 168(f)(1), the salvage value is zero under section 168(b)(4). It doesn't matter if you call it something else, like a reserve, it is a salvage value. If you do elect out of MACRS, it must be to a method that is not expressed in terms of years, in which case salvage value is not an especially relevant concept. Assuming the trucks falls into asset class 00.241 and you do not properly elect out of MACRS, the allowed or allowable rule would treat all realized gain as ordinary income in the year of sale.

[BOB W]

Unless you elect out of MACRS under section 168(f)(1), the salvage value is zero under section 168(b)(4). It doesn't matter if you call it something else, like a reserve, it is a salvage value. If you do elect out of MACRS, it must be to a method that is not expressed in terms of years, in which case salvage value is not an especially relevant concept. Assuming the trucks falls into asset class 00.241 and you do not properly elect out of MACRS, the allowed or allowable rule would treat all realized gain as ordinary income in the year of sale.

Don't you just hate tax students that are ready to graduate.


Great post, I guess!

[KarenMM]

Thanks all - you've confirmed

my gut feelings on this.... I will mention to the client the benefits of self-employment taxes being lowered by depreciation, with no recapture. That should convince him to go with MACRS numbers!

[taxstudent]

Don't you just hate tax students that are ready to graduate.


Great post, I guess!

Thanks, I guess. ;-)

"taxstudent" is carried over from Intuit's TaxAlmanac. I'm a practitioner, but I am, at the moment, also a student. But I meant "student" in the more general sense of always learning the rules of the game.

[BOB W]

Thanks, I guess. ;-)

"taxstudent" is carried over from Intuit's TaxAlmanac. I'm a practitioner, but I am, at the moment, also a student. But I meant "student" in the more general sense of always learning the rules of the game.

In that case, we are all students. Just that some of us are a little slower that others> but then, I can only speak for me> being slower.............

Welcome aboard, fresh blood is always needed.

[Jesse]

allowed or allowable?

Explain to your client that when they sell they are just recapturing a portion of what you have previously deducted.

Slight chuckle when I read "explain they are just". Some people just don't want to get it! They think it is unfair and somehow the are getting taxed twice. I'ts kind of like certain people that think they are getting taxed twice when they have to include part or all of their state refund as income. They just don't want to understand that they were able to decrease their income by an amount they actually are getting back.

[Bees Knees]

Taxstudent has it correct on this one.

Salvage value hasn't been allowed in figuring tax depreciation since before 1981. Gain is figured on depreciation allowed, even if the TP chooses not to claim all depreciation.

Besides, this is our opportunity to educate our clients when they suggest stupid things like this. Depreciation recapture is actually a deferral of tax, and an SE tax loophole.

For example, I buy a truck today for $128,000, and take Section 179 for the full amount. I deduct that on my Schedule C which also reduces SE tax. I sell the truck one year from now for $95,000 and recapture that amount on Form 4797.

Result?

I got a permanent deduction of $33,000 (128,000 - 95,000) against ordinary income.
I got a one year tax deferral of $95,000 against ordinary income.
I got a permanent deduction of $128,000 against SE taxable income.

Why in the world would I choose not to claim depreciation simply to avoid reporting $95,000 of recapture one year later?

Its all in how you explain it to your client.

[snowbird]

"Why in the world would I choose not to claim depreciation simply to avoid reporting $95,000 of recapture one year later?"

The same reason that many tp's continue to have over with hold year after year, no financial discipline. Not knowing the client business or the truck, a recapture could be a large bump in taxable income in the year sold. If the client is an independent over the highway trucker, his book keeping may be left /right pocket.

[Bees Knees]

"Why in the world would I choose not to claim depreciation simply to avoid reporting $95,000 of recapture one year later?"

The same reason that many tp's continue to have over with hold year after year, no financial discipline. Not knowing the client business or the truck, a recapture could be a large bump in taxable income in the year sold. If the client is an independent over the highway trucker, his book keeping may be left /right pocket.

OK fine. Then I say to the client, I will pay the extra $5,000 tax you have to pay 10 years from now, if you give me the $8,000 you will save right now for claiming the deduction.

[veritas]

Slight chuckle when I read "explain they are just". Some people just don't want to get it! They think it is unfair and somehow the are getting taxed twice. I'ts kind of like certain people that think they are getting taxed twice when they have to include part or all of their state refund as income. They just don't want to understand that they were able to decrease their income by an amount they actually are getting back.

I agree with you on this one. Isn't it amazing though how quickly the client grasps a concept when it means lower taxes?