Client is closing Sch C 12/31/17 and renting building and equipment to new owner of the business. Am I correct that since client was a sole proprietor (assets were not in a corporation and the assets are not considered own separately from the client), that there is no recognition of gain moving these from a Sch C to a Sch E as rental property and the basis continues the same on the Sch E depreciation schedule??? I'm stressed all of a sudden freaking out worried about this being considered converting to "personal use" and would have to recognized gain and sect 179 recapture. However the assets are not being converted to personal use and the business use % is staying at 100% in the rental activity (not dropping as if converted to personal use).
USA Sole Proprietor Sch C converting depreciable Assets to Sch E rental
- Thread starter cdicpa
- Start date
Thank you drmdcpa for replying.
I would agree with you if the client was "in the business" of renting Tools & Equipment, however the client is not. Simply renting these assets in a profit motive does not make this a trade or business subject to Sch C. Personal property rental of this nature should go on line 21 "other income" and related expenses go on line 36 and maked as "PPR". No losses are allowed in this situation. I agree it's a fine line and the research can be confusing, but with careful analysis I think I'm correct on this?
I would agree with you if the client was "in the business" of renting Tools & Equipment, however the client is not. Simply renting these assets in a profit motive does not make this a trade or business subject to Sch C. Personal property rental of this nature should go on line 21 "other income" and related expenses go on line 36 and maked as "PPR". No losses are allowed in this situation. I agree it's a fine line and the research can be confusing, but with careful analysis I think I'm correct on this?
Also, last night I was stressed, tired, overwhelmed, and well, you guys know what I mean, brain damaged already. However I would like to clarify for others what happens when a sole proprietor (or disregarded entity such as a single member LLC) closes business and keeps the depreciable assets of the business.
1. This does NOT trigger depreciation recapture nor is it considered a sale. (if it was an S Corporation or C Corp, it's a whole different story). Depreciation recapture will only happen when the assets are sold, except for any section 179 recapture.
2. Section 179 recapture can happen anytime assets depreciated under sect 179 drops to 50% or below business use. The amount recaptured is the excess depreciation over straight line.
Example: Equipment (7-year life) purchased on Jan 1, 2008 for $10,000 was all section 179 expensed in 2008. In 2016 taxpayer closed Schedule C and asset was converted to personal use. A. There is no depreciation recapture or gain recognized until the asset is sold. B. The asset would have fully depreciated in comparison under Macrs or straight line by 2016. There is no "excess depreciation over straight line" at the time of conversion (the asset would have been fully depreciated by then) so there is no sect 179 recapture.
IF the 179 asset has passed it's useful life at the time of conversion (or 50% or below business use) then there is no sect 179 recapture! Makes sense really because if you had depreciated the asset without sect 179 it would have already been totally depreciated out.
3. Be careful with listed property as well. Sect 280F
1. This does NOT trigger depreciation recapture nor is it considered a sale. (if it was an S Corporation or C Corp, it's a whole different story). Depreciation recapture will only happen when the assets are sold, except for any section 179 recapture.
2. Section 179 recapture can happen anytime assets depreciated under sect 179 drops to 50% or below business use. The amount recaptured is the excess depreciation over straight line.
Example: Equipment (7-year life) purchased on Jan 1, 2008 for $10,000 was all section 179 expensed in 2008. In 2016 taxpayer closed Schedule C and asset was converted to personal use. A. There is no depreciation recapture or gain recognized until the asset is sold. B. The asset would have fully depreciated in comparison under Macrs or straight line by 2016. There is no "excess depreciation over straight line" at the time of conversion (the asset would have been fully depreciated by then) so there is no sect 179 recapture.
IF the 179 asset has passed it's useful life at the time of conversion (or 50% or below business use) then there is no sect 179 recapture! Makes sense really because if you had depreciated the asset without sect 179 it would have already been totally depreciated out.
3. Be careful with listed property as well. Sect 280F
Yep, I concede, the “....and you are involved in the activity continuity and regularity” I missed. Shows up on the recent 1040 instructions. Dogs!!!! I don’t remember that in the past, that’s a disadvantage of being in this too long.