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PostPosted: Thu Apr 01, 2010 12:24 pm 
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Location: League City, Texas
I had a small business that was closed on 07/31/2009. Most of the assets were sold from August through October and I know the correct entries for recording the gains or losses on disposal, but I have a few questions about the remaining assets.

1...One piece of depreciated equipment was sold for $2000 cash in March of this year. Should that item remain on the books until the 2010 tax year, or can I record the sale in 2009 for tax purposes? All accounting for business transactions have been done on a "cash basis." Since the business was closed in 2009, should I continue depreciating the item through March 2010?

2...Three depreciated items (a PC, a small scanner and a desktop printer) were kept for my own personal use. How do I account for this on the company's books?

Thanks for any help that you can provide.


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PostPosted: Sat Apr 03, 2010 12:14 pm 
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Location: Wichita Falls, Texas
Quote:
1...One piece of depreciated equipment was sold for $2000 cash in March of this year. Should that item remain on the books until the 2010 tax year, or can I record the sale in 2009 for tax purposes? All accounting for business transactions have been done on a "cash basis." Since the business was closed in 2009, should I continue depreciating the item through March 2010?


I think it would remain on the books until sold. I would report the sale in 2010, that is when it occurred. Reporting the sale and any resulting income or loss in a different year would result in more or less taxes being paid in the year reported, versus actual transactions for that year.

You take depreciation on assets until the earlier of fully recovering your cost or retiring it from service. You retired it from service on 7/31/2009. NO depreciation should be taken after that, in my opinion. See "Retired From Service", Page 7, Pub. 946 "How to Depreciate Property", link below.

http://www.irs.gov/pub/irs-pdf/p946.pdf

As far as converting business property to personal use, what type of business structure was the business, sole proprietor, partnership, or corp.?

Did anyone else invest capital in your business besides you?


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PostPosted: Sat Apr 03, 2010 3:37 pm 
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Thanks, dp1903. I appreciate the answer, and the link to the IRS publication.

In answer to your question: The business was a sole proprietorship. No one else invested in the business.
How does that affect the conversion of business property to personal use?


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PostPosted: Sat Apr 03, 2010 4:37 pm 
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You and the business are the same, no gain or loss, in my opinion, since you are not selling it. Maybe it's a gain to you personally, but a loss to you business wise, a wash. No need to report it. I see it the same as a draw. It simply takes equity out of your business, but no gain or loss to report.

When you bought the equipment, you debited equipment and credited cash. I assume the cash was a debit and equity was a credit at some point. So, you are taking equity out again, debit equity, debit accumulated depreciation, and credit equipment.


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PostPosted: Sat Apr 03, 2010 5:01 pm 
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However, there is the possibility of having to recapture and report as income the excess depreciation of MACRS over straight line depreication for the equipment. I'm checking on that.


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PostPosted: Sat Apr 03, 2010 6:05 pm 
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I'm not sure about the computer, scanner, and printer. They are all listed property, assuming they were not used in a "regular place of business" such as rented office space or a home office declared as such and deducted on tax return.

If it is listed property, then there could be recapture of excess depreciation over straight line, but I don't know for sure. I can't find any definitive guidance on that particular situation. All pub 946, "How to Depreciate Property" says is on page 64 under "Recapture of Excess Depreciation". It says:
Quote:
If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less.


This, ofcourse, means during the years before the asset has been fully depreciated, I assume. Whether this also includes when a business ceases and when a listed property asset is retired before the end of it's useful life, I find no specific guidance on. The link below is not helpful either.

http://www.taxalmanac.org/index.php/Dis ... ess_assets


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PostPosted: Sat Apr 03, 2010 6:32 pm 
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The following thread seems to think there is recapture for listed property. I think I'd call the IRS for clarification.

http://www.taxalmanac.org/index.php/Dis ... _Recapture

Did you claim a home office deduction on Form 8829? If so, I don't think recapture is necessary, otherwise it may be.


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PostPosted: Sat Apr 03, 2010 6:48 pm 
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I did not claim a home office deduction. The business was always located in rented office space.

The PC and printer were purchased in 2005, and the small scanner was purchased in 2007, so they all have low book values as of 07/31/09. I'm not sure why I am telling you this, but it might have some significance.

I will contact the IRS to be on the safe side. I don't want a future adjustment as a result of an auditor finding that the recapture should have been done.

Thanks for all of the good info. I'm glad that I posted the questions.


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PostPosted: Sat Apr 03, 2010 8:19 pm 
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Quote:
The business was always located in rented office space.


Section 280F(d)(4)(b) of the IRS code states:
Quote:
(B) Exception for certain computers
The term ''listed property'' shall not include any computer
or peripheral equipment (as so defined) used exclusively at a
regular business establishment and owned or leased by the
person operating such establishment. For purposes of the
preceding sentence, any portion of a dwelling unit shall be
treated as a regular business establishment if (and only if)
the requirements of section 280A(c)(1) are met with respect to
such portion.


http://www.taxalmanac.org/index.php/Int ... l_purposes

My opinion is that if your computer, scanner, and printer were used exclusively at your rented office that they are not listed property, and, therefore, no depreciation recapture would be necessary. Also, such equipment is not subject to listed property record keeping requirements and their basis may be depreciated 100% as business property. The only other time I can find where non listed property MACRS depreciation would be subject to recapture is if there were a gain recognized upon its disposition/retirement. That did not occur.

If the IRS disagrees with that I would seek advice from an experienced enrolled agent or tax experienced CPA


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