S Corp vehicle from business to personal use

[KJ Judd]

S corp used van for business & depreciated. In late 2005 converted van to 100% personal use. Conversion of MACRS property from business to personal use is treated as disposition of property with no gain. (I have to calculate to see if I have any accerated depreciation to recapture.)

Do I need to report this as a property distribution on 1120S? And if so, what do I report - FMV or the larger undepreciated value?

[OldJack]

1. Property distribution on 1120S, page 3, line 16d, is FMV amount.

2. Form 4797 should show sale at FMV with gain/loss. There is no such thing as conversion at no gain or loss unless it just happens to compute as such.

3. If purchaser paid something (cash) for the asset less than FMV it is treated as a contribution rather than the sale price or you net the property distribution.

[KJ Judd]

Td 9132

TD 9132 indicates when use changes from business to personal use it is treated as disposition of property with no gain or loss recognized.

[veritas]

The conversion of the van is a sale at fair market value. If the purchaser is related no loss is allowed at the corporate level.

[OldJack]

TD 9132 indicates when use changes from business to personal use it is treated as disposition of property with no gain or loss recognized.

Quote from Summary, page 1, TD 9132:
"This document contains final and temporary regulations relating to the depreciation of
property subject to section 168 of the Internal Revenue Code (MACRS property).
Specifically, these regulations provide guidance on how to depreciate MACRS
property for which the use changes in the hands of the same taxpayer. The
regulations reflect changes to the law made by the Tax Reform Act of 1986."


An S-corp and a Shareholder are not the same taxpayer changing hands of use.

[Bees Knees]

Did the title change from corporate ownership to personal ownership?

If the corporation is just letting the shareholder use the vehicle for personal use but the corporation still owns the van, it sounds to me more like this would fall under the company car rules. The personal use gets added to the shareholder's W-2 wage, and the corporation continues to deduct cost.

[veritas]

Good catch Bees Knees. The original message did not say removed from the corporation just converted to personal use.

[OldJack]

disposition

Original post was talking about "disposition of property" by conversion and how to account for it on the books and tax return. If the intent was to convert to 100% personal ownership it no longer is a business use and it was therefore a "disposition" for federal taxes regardless of the title papers. If the intent is to provide a fringe benefit to the shareholder, then I agree it is a taxable benefit added to the W2 of the shareholder/officer.

If you capitalize a leased vehicle you don't have title and if you do not exercise the option to purchase such vehicle you have a disposition of property.

[KJ Judd]

Thanks Old Jack. I was thinking of the S Corp & individual as same taxpayer as the individual is the sole shareholder.

However as I am entering this in the return, it seems odd that the S corp can generate a large loss simply by distributing the van to the shareholder who didn't pay anything for the van.

So if I understand you right, I'd have a $12k loss (van was a previous like-kind exchange) on the disposition, and then $12k distribution to s/h. Which would be in excess of basis. Ugh! Am I missing something?

[veritas]

Again no loss is allowed between related taxpayers which includes shareholders of a closely held corportaion.

[OldJack]

Again.. the shareholder has to pay (or distribution) for the vehicle at FMV. Why should he get ownership for free as the S-corp is a separate entity. As others stated if the S-corp has a loss it has a loss based upon the FMV as a sale. If it results in a loss it shows a loss on the S-corp books, but the loss simply is not deductible by the S-corp and therefore does not pass through as a deductible loss to the shareholder. The non-deductible loss is accounted for in Sch-M on page 4 of the 1120S and it does effect basis.

When individuals incorporate they create a separate tax entity and only elect to pay the tax for the entity. The tax rules let the shareholder put assets in the corporation tax free for stock but it does not let them take them back without gain or loss.

You are not missing anything... the taxpayer was missing your advice before doing the transaction. Now, as was pointed out by others if the title is still in the name of the corporation your taxpayer might take the attitude that the S-corp still owns and he is just using the vehicle as a fringe benefit and is willing to add the benefit per the "annual lease value table" to his W2 gross. Of course your taxpayer has been adding to the W2 every year since the purchase of the vehicle, right?