Discussion:Deemed disposition of asset

I have two questions. First, how much more income needs to be shown on the return (besides the $16,500 recaptured)? Second, what entry am I missing to close the taxpayers’ books?

Dr. Accumulated Depreciation 16,500

       Cr.  Gain on 179 recapture      16,500

Dr. Accumulated Depreciation 7,500 Dr. Note Payable 34,485

        Cr.       Equipment            24,000
        Cr.

Thank you in advance to anyone who contributes to this discussion. Your input is greatly appreciated.

Dr. Accumulated Depreciation 16,501 Cr. Gain on 179 recapture 16,501 Recapture the 179 and reinstate some basis.

Dr. Accumulated Depreciation 7,499 Dr. Note Payable 34,485 Cr. Equipment 24,000 Cr. Gain on disposition 17,984

So am I going to have $34,485 in income on the tax return (16,501 + 17,984)?

Why is accumulated deprecation not $24,000? I don't believe the books are in order, based on the statements you have made.

Is this statement correct?

"Taxpayer receives loan proceeds and gives directly to bank, reducing note payable on replacement truck." What loan?

Did the prior accountant report the 24,000 as income?

Prior accountant places replacement truck on the books at $24,000 and takes a 179 election on the entire amount. Meaning you have nothing left to deprecate.

Okay, now I believe you are doing homework and are trying to disguise the fact.

Dennis, What amount of income do you think needs to be shown and what further adjustment in my closing entry? Thank you in advance, I'm a young, sole proprietor (CPA) who realizes he needs to find a mentor, but in the meantime needs to make sure I'm handling this situation correctly.Mbaqb 09:20, 10 March 2008 (CDT)

  1.  §179 is an election to expense, so the 2005 entry would have been DR §179 expense, CR Equipment, leaving zero in that category.
  2.  Income recognition from §179 recapture is the difference between what you took and what you would have been allowed during the period the asset qualified.
  3.  The concept of the half year is basic to MACRS.  Mid quarter (4th) is in this case derived by:

full year--2/3 (double declining balance) @ 1/4 = 1/6 and then 1/2 of that to get the 1/12. Depreciation in the year of sale is correspondingly 1/2 of what would have been allowable for the full year. Therefore (1-1/12)x2/3 = .611, half of which is allowable.

   If you follow the journal entries I gave you earlier, recognized gain will be debt relief less §179 recapture.
   The advice I usually give to young CPA's is that when seeking a position, mentoring is more important than salary.

Dennis,

Thank you for your response. I appreciate your wisdom and experience.

The entry that the prior accounting firm did on the books in 05 was Dr. Dep Exp $24,000 and Cr. Accumulated Depreciation $24,000 to record the Sec. 179 election.

I had calculated that since he disposed of the asset in the second quarter he would have been entitled to 37.5% of the full year depreciation allowed, which would be the 61.11%. 24,000 x 61.11% = $14,666. 14,666 x 37.5% = 5,500. 5,500 + 1,999 (8.33% x 24,000 = 1,999 from 05) = 7,499. My income recognition from 179 recapture is the difference between what was taken (24,000) and what would have been allowed without the election (7,499). I've got 179 recapture of 16,501 (24,000-7,499).

The debt relief is the note that the son assumed (34,485). The debt relief less the 179 recapture is 17,984 (34,485-16,501). If the 17,984 is gain on disposition of the asset, won't I show 34,485 in income on the return (16,501 in recapture + 17,984 in gain on disposition = 34,485)?

My two issues are the amount I need to show as income on the tax return and closing out his books. If indeed I need to show 17,984 in gain on disposition of the asset, then the closing entry (12/31/06) would be as follows correct?

Dr. Accumulated Depreciation 16,501 Cr. Gain on 179 recapture 16,501 To recapture the 179 election and restore basis

Then,

Dr. Accumulated Depreciation 7,499 (This needs to be removed from the books) Dr. Note Payable 34,485 Cr. Equipment 24,000 (This also needs to be removed from the books) Cr. Gain on disposition of asset 17,984 To remove the equipment and related accumulated depreciation from the books, as well as the related note payable and recognize gain on the disposition of the asset.

Mbaqb 13:12, 14 March 2008 (CDT)

reread my last post. You are calculating depreciation in year of disposition incorrectly.

Dennis,

Thanks for your help on this.

So the 24000 at 61.11% = 14666 and half of that is allowable, so 14666 x 30.55% = 4480 4480 + 1999 (05 allowable amount) = 6479 Giving me a recapture amount of 17521 (24000-6479).

Is the 17521 all that I need to show on the tax return as income? Or would I also need to show the 16964 (34485 total)?

Then to close the books, I'll start with:

Dr Accum Depr 24000 Cr Equipment 24000

If I reread the entries you gave me that we talked about, I'll also put in:

Dr Equipment 24000 Dr Note Payable 34,485 Cr Equipment 24000 Cr Other Income (179 recapture) 17521 Cr Gain on sale 16964

DR Asset 14668 CR Other income 14668.

DR Note 34485 CR Asset 14668 CR Gain 19817

Ah. I see what you're saying, thus 24000 x 61.11% = 14666 x 50% =7333 + 1999 (05 allowable) = 9332 24000-9332= 14668 to recapture.

Dr Equip 14668 Cr Other Income 14668

Dr Note Payable 34485 Cr Equip 14668 Cr Gain on disposition 19817

On the return I know I need to show the recapture amount (14668), but what about the gain on disposition? Can't he and his wife gift that amount?

Thanks Dennis.

Mbaqb 12:18, 15 March 2008 (CDT)

Any way I see it the "full" $24,000 of Sec 179 or depreciation or whatever you want to call it is subject to recapture.

I am not pontificationing on the amount between the FMV and the amount of debt.

Thanks for your replies, I appreciate your input. There wasn't a sale. The asset was gifted to his son. When you use the words, "entire amount of the sale", are you talking about the amount outstanding on the note (34,485) that was assumed by the son?

I'm wondering about the amount between the recapture amount and the debt that was assumed (34,485)? I believe the difference between the FMV (42-43K) and the debt assumed (34,485) could be gifted, but am wondering about the amount between the recapture amount and the debt assumed.

Also, an individual who sells property for less than its fair market value, intending the bargain element as a gift, must recognize gain on the transfer to the extent the amount realized in the sale exceeds her adjusted basis in the property.

The amount realized from the sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the disposition. Thus, a gift of property that is subject to liabilities is treated as a bargain sale.

after the normal ADS recovery period, there would be no amount to recapture

These items are reported on part IV of the 4797

anything on Part I of the 4797 goes to Sch D, does not pass go, and does not collect $200 UNLESS prior §1231 losses in the prior 5 years

Part II of the 4797 goes to 1040 line 14

Replacement truck wrecked 12/01/05? Elects to reduce basis by $24,000 per Section 1033.

What is the holding period of replacement truck, and when do start figuring allowable depreciation (non Section 179) for the bottom Page 2, of 4797?

The instructions say to increase my basis for the amount of any recapture gain!

How come the holding period is not longer, you had a Section 1033 basis reduction? You do know that, and, you do know how to determine the holding period when you a Section 1033 basis reduction.

Part IV, yes, for Section 179, however, did you read the part about increasing your basis for the recapture amount, and Part IV is only about Section 179 recapture not depreciation recapture.

I am basically not talking about 179 recapture. It is the rest of the gain I am talking about.

If you want the complete picture, sorry, SOL, I have tried to lead you to water, but you won't drink.

As for as other comments, if, I am wrong, I ask anyone to tell so. I well gracefully acknowledge my mistake. I have been wrong many times.

The prior accounting firm showed the original truck as disposed in Section I of the 4797 with the wreck date (12/1/05) under "date of sale". Because of that I've been under the assumption that the holding period for the replacement truck, shown as placed on the books at 12/8/05, would only have been for 5+ months.

Roy are you saying the 179 recapture should go on the Sch C then and the difference between the 179 recapture and the debt relief be shown on Part II of the 4797?

lacertesupport@lscsoft.com to me, me show details Mar 28 (2 days ago) Reply

Hello -

Please enter the Section 179 recapture amount to be reported on the Schedule C in "Other Income (Ctrl-E)" (screen 16, code 54). The program doesn't automatically carry recapture of Section 179 to the appropriate business activity.

If the income to be recognized as gain due to debt relief is attributable to business debt, then the income should be reported on the business activity. Please also use "Other Income (Ctrl-E)" (screen 16, code 54) to report any gain due to cancellation of debt income.

We apologize for the delay and thank you for your patience.

Please let us know if we can assist you further.

Sarah N.

Product=Lacerte Tax TaxYear=2006 OperatingSystem=Windows XP

Naturally, if you know what you are saying i.e. debt relief you get the answer you get get, which is incorrect, not on LaCerte part, but on the way you framed the question. You presupposed that there is debt relief, therefore you called it debt relief, today everyone is thinking forgiveness of debt, which, LaCrete answer was correct if that was the case. However, with the facts you have given you do not COD (cancellation of debt income), in my way of thinking.

There are a lot of knowledgeable people on this web cite and I have asked everyone of them to correct me if I have been wrong.

I would like to think that you are right on how Lacerte perceived the question. I've attached wording from my inquiry below. There are a lot of knowledgeable people at this site and I'd like someone else to concur with you on where the other portion of the gain (after Sec. 179 recapture) should be shown. When I said it appeared that I had "gain up to the amount of the debt relief, and it appears that all of it may have to be shown as other income on the schedule C (self-employment tax, yuck!)", Kevin agreed.

Hi,

I have a client who previously used the 179 election on an asset (2005 return) reducing his tax basis in the asset to zero; then in 2006 someone took over his loan on the piece of equipment. I'm trying to get the system to show the gain, but haven't had any success. Please help, thank you.

Basis in the truck as of Dec 05 was $24K. Took $179 election on all $24K on his 2005 return. In 2006, someone else took over his loan on the equipment ($34K at the time). Client's tax basis in the equipment was zero, thus trying to properly show the gain with the software and not having success. Please help.

[CaseID=1-2213472201]

lacertesupport@lscsoft.com to me, me show details Mar 28 (2 days ago) Reply

Hello -

Please enter the Section 179 recapture amount to be reported on the Schedule C in "Other Income (Ctrl-E)" (screen 16, code 54). The program doesn't automatically carry recapture of Section 179 to the appropriate business activity.

If the income to be recognized as gain due to debt relief is attributable to business debt, then the income should be reported on the business activity. Please also use "Other Income (Ctrl-E)" (screen 16, code 54) to report any gain due to cancellation of debt income.

We apologize for the delay and thank you for your patience.

Please let us know if we can assist you further.

Sarah N.

Product=Lacerte Tax TaxYear=2006 OperatingSystem=Windows XP

On March 28th I posted: I'm trying to figure out whether the 179 recapture amounts and the other gain on disposition amounts should all be shown on the Other Income line on the Schedule C or whether the other gain on disposition needs to be shown on part II of the 4797? I believe that I have gain up to the amount of the debt relief, and it appears that all of it may have to be shown as other income on the schedule C (self-employment tax, yuck!). Thanks!

Kevin responded yes. It's not that far up the discussion if you want to scroll up.

If, by now you don't believe you have the correct solution to your question, I am sorry, I guess I don't how to answer your question.

I think the Sec. 179 recapture should be shown on Part IV of the 4797 and carried to the other income line on the Schedule C. I also think that the difference between the 179 amount recaptured less the amount of debt relief, should be shown on Part II of the 4797 (not the Schedule C). Don't you agree?

Accum Depn = $48,000 (24,000 + 24,000) Section 179 Recapture = $16,000 (what ever number it is I am using $16,000 as example.

Section II 4797 Entry = Selling price = $34,484 (amount of debt) Basis = $16,000 (amount of Sec 179 recapture, what ever that is) Gain on part II 4797 = (34,484 - 16,000 (use real number)) or $18,484.

See how easy that was? Where do I sent the bill?

Column D= Sales price 34,484 Column E= Depreciation allowed or allowable since acquisition 24,000 Column F= Cost or other basis plus expenses of sale 40,501 (24,000 Cost + 16,501 of 179 recaptured)

D+E-F=G

Column G= Gain of 18,484 on the 4797, carries to line 14

Lacerte support is trying to tell me that the 4797 shouldn't be used and that the 18,484 should also be shown on the Sch. C under other income???

Column D= Sales price 34,484 Column E= Depreciation allowed or allowable since acquisition 24,000 Column F= Cost or other basis plus expenses of sale 40,501 (24,000 Cost + 16,501 of 179 recaptured)

D+E-F=G

Column G= Gain of 18,484 on the 4797, carries to line 14

Lacerte support is trying to tell me that the 4797 shouldn't be used and that the 18,484 should also be shown on the Sch. C under other income??? I think they're nuts.

I do not use LaCrete, sorry.

The total gain is $34,484. Section 179 "gain" or recapture is $xx,xxx and the regular Section 1245 recapture is the rest $xx,xxx. Now we all know that regular 1245 recapture per the instructions to the 4797 go to page 1 of the 1040.

Part II 4797 Line 18b goes to Line 14 page 1 1040 Line 18b is Line 17 - Line 18a (if any) Line 17 is Line 10 through Line 16 Line 13 is gain from Part III 4797 Line 31 (this is assets held for more then one year).

In the alternative is Line 10 for assets held for one year or less.

Seems pretty straight forward to you and me.

You know about the Section 179 in Part IV.

Just shoot me now. I really need to fire this client. After meeting with his banker, apparently the facts are that the taxpayer did not deed the asset to his son. The son did start making the payments on the truck, but nothing was changed on the loan paperwork or title of the asset. The taxpayer says that it sat in a lot with a for sale sign on it.

Then in 2007 the asset was sold for $28,700. So now I’m wondering, do I even need to do anything with 2006? Or simply show the $28,700 sales price with a disposition in 2007? Or do I show the recapture of the 179 in 2006 when the son starting making the payments and then show the $28,700 sale in 2007 (with an increased basis for the amount of 179 that was recaptured in 2006; 28,700 less the 16,501 recaptured= 12,199)???

This is not needed, "If so, I deeply apologize.", and you are never to comprise your professional judgment to anyone, your boss (if you have one), your client, etc. Even if ultimately we are incorrect in our judgment at the least our judgment was not comprised.

When there is a disposition that section 1245 applies to the amount of Section 179 expense allowed is treated, simply said, the same as regular depreciation. (No Section 179(d)(10) recapture)

Meaning, decease in use below 50%, goes to Schedule C, Section 1245 dispositions do not go to Schedule C.

Good work.

I filed an extension for him for 2007, but will not be preparing his 2007 tax return. I've been unable to obtain clear facts with numerous issues regarding his business, specifically, who the truck was actually sold to in 2007 (was it the son who started to make the payments in 2006, or an unrelated third party buyer). I was given a different set of "facts" this spring than what I was given last fall when the 2006 return was prepared. I'm debating whether to prepare an amended 2006 return to give to the taxpayer, and if so, how to show what transpired. If the son is the one who actually bought the truck in 2007 (which again I haven't been able to ascertain), then I think that there was definitely a disposition in 2006, and that I need to prepare an amended return showing the disposition on the 4797. If the truck was actually sold in 2007 to an unrelated third party, then the question becomes should I still prepare a 2006 amended return, but instead of showing a disposition, show the business use falling below 50% on part IV of the 4797? The taxpayer has told me that the truck sat in lot with a for sale sign on it, but he has also said that the truck was being used by the son in a separate business (and the son was making the payments on the truck). I am fairly certain that the taxpayer will NOT sign and mail a 2006 amended return, regardless of what's on it. The taxpayer appears to be set on reporting the sale in 2007. At this point, I'm simply protecting myself against any future liablilty and trying to accurately report what's happened on the return, but with the different facts given, this is proving difficult. Any thoughts or suggestions?