Sale of Former Business Asset

[equinecpa]

I have a client that ran their own business up to 2004. They had a truck and trailer (truck is F550 so not listed property) used 100% for business use. They shut down the business in 2004 but kept the truck and trailer, so therefore converted to personal use.

They sold both in 2007. I'm trying to find what basis I use to calculate a gain or loss? Do I just take the ACB when converted to personal use? And are losses deductible (I'm not sure if this would be considered a personal loss or business loss or BOTH?)

IRS or TTB reference would be great (I couldn't find this in the book)

In looking at the figures there is a large gain on the sale of these assets. Would the taxpayer be able to add interest paid on the loan since closing the business to basis?

Carolyn

[BHoffman]

Converted to Personal Use in 2004?

Wouldn't any applicable gain already have been recognized (and taxed) in 2004 when the truck was converted to personal use?

[equinecpa]

I believe the recapture only applies to listed property..this was not.

[Gretel]

Here is my take. If Sch. C business than gain needs to be reported when asset is sold. Basis would be whatever it was when business closed. Interest paid after that date is personal interest.

[Snaggletooth]

Form 4797

My take: Sell the item on form 4797. You have to recapture depreciation that was "allowed or allowable." I'm not a good source for interpreting just what "allowable" means, but a typical example would be depreciation that the owner was entitled to deduct but did not (for any number of reasons). If no use in business, I don't think the "allowable" doctrine applies.

I believe the interest since the business shut down would be deductible anyway, on a schedule C, schedule E, 4952 or whatever. Even if there were no business operations.

One curious item which probably falls through the crack in this discussion, and not sure it has any relevance. This truck is so large that it defies "listed property" classification. Presumably because it is of such nature that it "cannot be practically used" for personal purposes. Then how can it be used for personal purposes since the business shutdown?

[Bees Knees]

The listed property recapture rules (IRS Pub 946, page 59) say you recapture Section 179, Special Depreciation Allowance, and any GDS depreciation and declining balance method (MACRS) when business use drops to 50% or less.

In addition to those rules, ALL business property (including non-listed property) is subject to recapture if Section 179 was elected, and business use drops to 50% or less during any year of the property’s recovery period (5 years for trucks) (IRS Pub 946, page 23). It is interesting that the Special Depreciation Allowance (IRS Pub 946, page 31) does not have a similar rule. The 50% or less business use recapture rule for non-listed property only applies if Section 179 was claimed.

As to your cost basis upon disposition, IRS Pub 946, page 7 says you stop depreciation when you retire the asset from service, even if it is not fully depreciated.

IRC Section 1016(a)(2) says the adjusted basis of an asset is reduced by any depreciation allowed or allowable, meaning even if the depreciation was not claimed, it still reduces the adjusted basis of the asset. It does not say the adjusted basis goes back to original cost after an asset is taken out of service. Therefore, depreciation is a permanent reduction in the adjusted basis, unless Section 179 or MACRS needs to be recaptured under one of those rules.

So what does all of this mean? If any Section 179 was taken on this truck and trailer, and 2004 was still within the recovery period, then recapture would have applied in 2004 (since business use fell to zero) and any excess depreciation over regular MACRS at that time would have been taxed as ordinary income in 2004, thus increasing the adjusted basis of the truck and trailer accordingly.

All depreciation would have stopped in 2004 when the truck and trailer were taken out of service.

The adjusted basis of the truck and trailer for purposes of figuring gain in 2007 would equal original cost, plus improvements, minus depreciation allowed, plus any Section 179 recapture from 2004.

Since the truck and trailer were converted to personal use in 2004, they are no longer considered business assets in 2007, even though the adjusted basis still reflects prior depreciation from when they were business assets. Therefore, if there is a loss on the sale, the loss is not deductible.

There could be some wiggle room here for when an asset is considered converted to personal use, thus taking away any loss upon sale. However, in my opinion, using it for personal purposes for at least 3 years takes that wiggle room away. It was personal use property when sold, therefore, no loss allowed.

Snag also questioned the ability to use an F550 and trailer for personal use. Just doing a quick google search, apparently this model uses the same body as a conventional pickup. And there are even pickup conversions out there to turn it into a regular pickup truck. I wouldn’t want to use one to commute into the city, but I see a lot of guys on the freeway driving huge pickups to work. My brother in law has a one ton with duel rear wheels, extended cab, and extended cargo bed half the length of a football field to haul his camper around with, and he is a computer nerd. I could easily see him driving one of these monster trucks into the office every day.

[veritas]

Bees

If the truck has been sold for a gain, what would the character of the gain be?

[Bees Knees]

Gain due to prior depreciation is still depreciation recapture, subject to ordinary gain treatment. It doesn't matter how long ago it was since depreciation was taken. Depreciation recapture rules even apply if you receive property as a gift, and the donor used it for business and took depreciation deductions on the property (IRS Pub 544, page 26).