Discussion:Disposition of sec. 179 asset

My question is how to show the disposition of this asset. The prior accountant had the 98 semi truck on the depreciation schedule as a MACRS 3 year asset, since it was a 98 purchased at the end of 2005. With a 3 year life, normal depreciation would be about $16K/year, leaving the asset with a reasonable FMV of between $32K and $36K. Even with a $12,000 gift, there is obviously still some gain to be had on the disposition of this business asset. Thoughts?

You didn't state the form of business - sole proprietorship, corporation? If a corporation owns the truck, transferring to son would mean a distribution to the owner, wiping off both the fixed asset and accum depreciation-issue 1099-DIV. If personally owned, wipe off both fixed asset and accum deprec. to owner's draw, work off the gift exclusion - file 709 to report excess of $ 12,000. That's my immediate thought. It's late at night, perhaps some other posters have a more proper way to handle this.

That then reduces the accumulated depreciation. Then you wipe off the books the accum deprec and fixed asset cost. If the difference exceeds the $ 12,000 - then you need to fill out the 709.

How do I show the disposition on the books (not the same as the tax, right, or not?)?

Also, where do I show it on the Schedule C (where the original 179 was taken)?

Thanks for your help. I'm having a hard time with this one.

You have three aspects to this tansaction.

1) Tax (sec 179 recapture) 2) closing the books (disposition of asset/deemed sale) -- because it is not an arms-length transaction, I recommend taking the higher of the FMV or the book value ($24,000 less the acc depr for 2005/2006 or whatever the truck is worth on the open market). 3) the gift tax consequences

Depending on your software, if you follow those steps, it should put everything on the correct form/line.

But I would close the books for the company before worrying about gift tax.

Do I take the $24K 179 election less normal depreciation of a $48K asset ($7-10K normal depreciation) or a $24K asset ($4-6K normal depreciation) in coming up with my recapture amount? Also, since I've also got a potential gift tax return....don't I take the FMV of the asset when it was deeded ($38K approx), less whatever AD is left after recapture, less $12,000 and place that amount on a 709?

HELP????!!!!

Now to the books (different to tax)Ignore the Sec 179 here:

Truck $35,000

    N/P - $35,000

Depreciate the truck as it should be done for the years in service (whatever year it was purchased through the 2005 wreck). Now for the income portion: The residual -- purchase price less accumulated depreciation (up to $24,000) -- is income on that return. That's your depreciation recapture.

Now to Part II of the question:

New truck:

Truck $48,000

     N/P - $24,000
     Cash - $24,000

For TAX purposes, depending on income, limitations, etc, he can depreciate the whole thing. FOR BOOK PURPOSES, make a separate entry. Give him the regular accelerated depreciation on the books.

Now, CLOSE THE BOOKS AND DISTRIBUTE THE PROPERTY TO THE TAXPAYER AT BOOK VALUE.

Finally, allow the taxpayer to gift the truck to his son (I am assuming they are in separate companies, not a partnership). I would gift it at FMV (because for all we know, trucks may be much more valuable on the open market and it is not an arms-length transaction), but he will only owe gift taxes to the extent that the gift exceeds $12,000.

Hope that helps!

Don't I only have recapture on up to the $24K?

Wouldn't I take normal accelerated deprectiation for a MACRS 3 year asset (that is how the prior CPA firm had the asset placed on the client's depreciation schedule)and subtract that amount from the $24K to come up with my depreciation recapture amount? Purchase was December 8, 2005 and the asset was disposed of sometime between April and July of 2006 (I need the client to specify exactly when...also, do I have to use mid quarter on the MACRS normal acclerated depreciation amount?)...

so wouldn't I just take the $3-6K of normal depreciation, subtract it from the $24K and the remainder is recaptured on the tax return?

Of course, then I'm also thinking that I have a 709 to file because the FMV at the time of disposition was approximately $38K, so the $38K, less the $3-6K of accumulated depreciation that would have normally been taken (or do I exclude this??), less $12,000 (sole proprietor who owned the truck himself, but he is married, does his wife need to be on the title for them to deed $24K to their son for the truck????) and the remainder would show up on a 709....of course I'm sure the client would want to use up some exemption then pay tax on that as well.

PLEASE HELP...THIS HAS BEEN A SERIOUS PAIN FOR ME AND IS DRIVING ME CRAZY!!!

Don't I only have recapture on up to the $24K?

Wouldn't I take normal accelerated deprectiation for a MACRS 3 year asset (that is how the prior CPA firm had the asset placed on the client's depreciation schedule)and subtract that amount from the $24K to come up with my depreciation recapture amount? Purchase was December 8, 2005 and the asset was disposed of sometime between April and July of 2006 (I need the client to specify exactly when...also, do I have to use mid quarter on the MACRS normal acclerated depreciation amount?)...

so wouldn't I just take the $3-6K of normal depreciation, subtract it from the $24K and the remainder is recaptured on the tax return?

Of course, then I'm also thinking that I have a 709 to file because the FMV at the time of disposition was approximately $38K, so the $38K, less the $3-6K of accumulated depreciation that would have normally been taken (or do I exclude this??), less $12,000 (sole proprietor who owned the truck himself, but he is married, does his wife need to be on the title for them to deed $24K to their son for the truck????) and the remainder would show up on a 709....of course I'm sure the client would want to use up some exemption then pay tax on that as well.

PLEASE HELP...THIS HAS BEEN A SERIOUS PAIN FOR ME AND IS DRIVING ME CRAZY!!!

I am also fairly new here, so I am only speaking for myself and NOT representing the feelings of others on this forum. In my opinion, there are a couple of reasons you are not receiving the level of response you are looking for.

1. You have not filled out your profile. The posters here generally like to know who they are offering advice to. This is a forum for tax professionals that need help or want to help other tax professionals, not a site for people to come and get free advice as a substitute for employing a tax professional. From my experience here, I have learned many posters are reluctant to respond to someone they know nothing about. That's not to say, however, that they haven't tried to help in this case, which brings me to my next point.

2. You seem fairly ungrateful about the help you have received up to this point. I understand that this stuff can be dense and frustrating, but the people here who are offering advice are taking time that they would normally bill to a client and using it to help you. "...that didn't help at all..." Actually, Sydney answered your gift tax question.

This site is an absolutely invaluable tool for me when I have to do research, and it wouldn't exist if there weren't people out there willing to DONATE their knowledge. Please fill out your profile. Good luck.

Someone better check my math, but I believe this is the general principle here. Trying to do this with software could be more difficult.

I took it from the original question about a 98 purchased late in 2005, but maybe I misread this. Point is that if MBA follows the principles, and DOES IT ON PAPER first, he should get there. Software is wonderful, but you should have some idea of 'how it all comes out!' If it was purchased in July-August 2006 then there is no mid-quarter problem.

You are doing now exactly what I want to do in the future, which is running your own tax practice. The reason I haven't done so yet is that I don't feel like I have the knowlege base to service the clients I would like to have. I work for "the tax partner" at my firm, and feel like I couldn't have chosen a better mentor. When something comes along that I can't handle (quite often!) I can always fall back on his knowledge base, and he will tell me WHY X is the answer. The point is that you might want to try and develop a relationship with somone whose expertise far surpasses yours that you can defer some of your more complex clients to or consult with about their returns (maybe someone that could put their blessing on your work). This will allow you to maintian a relationship with the more complex clients while still being able to service their needs. That's also a door that can swing both ways. I don't know how easy it would be to find someone like that, and I'm definitely not saying that the route I chose is better - as I said before, you are where I hope to be in the next few years - but to me there is no substitute for a good teacher.

Also, I would subscribe to some type of tax research publication. We use the CCH Tax Research Network at my firm and ordered most of the features. I doubt this would be a cost-effective choice for you, but there are others here that can probably recemmend some good stuff that's more affordable. There are probably some threads on this topic. I really like CCH and would recommend finding some type of web-based research tool that can be precisely searched. And you always the have the good people here at TaxAlmanac, the coolest thing since M.C Hammer. Another thing I have done the past couple of years is prepare a bunch of my friends returns by hand. This forces me to use the mechanics of all the different forms and actually understand how things are calculated. As Kevin says, "Tax software is no substitute for a good tax professional."

Well, I suppose that's enough. I guess I will have to go back to work now. Again, Branden, I hope we helped, and welcome.

I spend $1100 a year for RIA's Checkpoint, and my practice is just me. Until I ran into this site, however, I did feel times were passing me by, and still do to some extent when it comes to entity selection, mechanics of S Corps etc. If I am sorry for missing only one thing, it is/was sitting for the Tax Court exam.

I do hope now that you see the picture; you've been frank in telling us that your client did not simply retire the tractor but gave it away to his son, so that you have involved us in deemed sales, gift taxes etc.

A week later, on 12/8/05, the taxpayer purchased a 98 semi for $48,000, debiting their truck expense account and crediting cash. The client's prior accountant made a journal entry at 12/31/05 debiting accounts receivable $24,000 for the insurance proceeds that the client was to receive from the wrecked truck, debiting equipment for $24,000 and crediting the client's truck expense account for the $48,000. A Sec. 179 election was also made on the 2005 return for the entire $24,000 of the 98 semi truck, which was deeded to the son in the spring of 2006. The client isn't exactly sure on the date of the deeding of the truck to the son (the client thinks possibly 4/24/06, but it's been a while and he's not sure so we're checking with the bank). The prior accountant placed the asset on the depreciation schedule as a 3 year MACRS asset with a 200DB HY method, although the asset in question did represent 100% of the assets purchased during 2005 in this particular business the sole proprietor operated. Based on discussions above, it sounds like maybe the MQ convention should have been employed. Using MQ convention the depreciation recapture upon gifting the asset to his son is approximately $16,500 because the allowable depreciation would have been approximately $7,500.

Despite the fact that the client wrote a check for the 98 semi when he purchased it in 2005, he had to obtain financing to cover the purchase, so the truck had a note outstanding on it of approximately $38,000 when it was gifted in the spring of 2006. Because the FMV of the truck was greater than what the book value would have been with normal depreciation, for gifting purposes the $38,000 FMV of the truck, less a $12,000 gift allowance leaves $26,000 to show on a 709.

If anyone believes there is something that has been overlooked based on the information given and upon review of the posts associated with this topic, or if you simply concur with what has been laid out, please do so. I want to thank again EVERY person that has weighed in thus far on this topic and am very grateful for their contributions of valuable time and insights.

REV. RUL. 69-487

  An individual taxpayer operating a business as a sole proprietorship converted to personal use an automobile that had been used solely for business purposes. At that time, the fair market value of the automobile was substantially higher than its adjusted basis. 
 
  Held, for the purposes of section 1245 of the Internal Revenue Code of 1954, the conversion to personal use is not a "disposition" of the automobile. Accordingly, there is no gain to be recognized by the taxpayer upon the conversion to personal use. However, the provisions of section 1245 of the Code would apply to any disposition of the automobile by the taxpayer at a later date.

    (1) IN GENERAL. If a taxpayer's section 179 property is not 
    used predominantly in a trade or business of the taxpayer at 
    any time before the close of the second taxable year 
    following the taxable year in which the property is placed 
    in service by the taxpayer (recapture period), the taxpayer 
    must recapture in the taxable year in which the section 179 
    property is not used predominantly in a trade or business 
    any benefit derived from expensing such property. The 
    benefit derived from expensing the property is equal to the 
    excess of the amount expensed under this section over the 
    total amount that would have been allowable for prior 
    taxable years and the taxable year of recapture as a 
    deduction under section 168 (had section 179 not been 
    elected) for the portion of the cost of the property to 
    which the expensing relates (regardless of whether such 
    excess reduced the taxpayer's tax liability). For purposes

Dr. Accumulated Depreciation 16,500

                           Cr.    Gain on Sec. 179 recapture           16,500

To recapture 179 expense taken on replacement truck

Dr. Accumulated Depreciation 7,500

                           Cr.     Equipment-Replacement truck         24,000

Dr. Note Payable-assumed by son 34,485

                           Cr.	   ??????   (Owner’s draw?)             17,985

To remove the asset and accumulated depreciation off of the books, remove the note payable assumed by the son.

The depreciation recapture amount is $16,500 (24K less 7.5K allowable under MACRS MQ convention).

There’s not a gift tax issue because the FMV of the truck at the date of gifting was approximately $42-43K, but the son assumed a note worth $35,000. The $7-8K difference would be wiped out by the taxpayer’s $12K annual gift exemption.

I’m having trouble closing out the books because of the $17,985 credit entry from my previous post. Is it income? Or is my only income on the return going to be the $16,500 of depreciation recapture?

The taxpayer had a $24,000 gain on the disposal of the intitial truck (Purchased for $35K in 2001, took 179 election, 3 yr life, wrecked in December 05; insurance proceeds were $24K), but the prior accountant basically washed it into the purchase price of the new truck (new truck purchased for $48K, less the $24K insurance proceeds receivable became the $24K book value of new truck) and took the $24K Sec. 179 on the replacement truck.

Thank you in advance to responders for their time and efforts.