Corp auto traded in for personal auto

[Margaret CPA in OH]

So I just received an email from a client informing me that he, in December, traded in the company Audi for a Mercedes and registered it in his own name. The Audi was fully depreciated so had zero basis but must have had FMV for a trade-in. I'm thinking that is a capital gain to him.

The Audi is a distribution to this S-corp SH, fully depreciated, right? Some time ago I suggested that he do this and get mileage reimbursement from the company for business usage. In the past all auto expenses were charged to the company and I suspect that this guy is somewhat challenged in record keeping. This seemed a better solution. Opinions?

Thanks!

[OldJack]

>>The Audi is a distribution to this S-corp SH, fully depreciated, right?<<

Right... but it is a sale of an asset at FMV reported on form 4797 with gain passed to the shareholder on form 1120S-k1 to pay taxes.

Books:

Debit- Accum Depr $ COST

Credit- Property Cost-Vehicle $ COST

Debit- Due from Shareholder or Property Distribution account $FMV

Credit- Gain on Sale of Assets (income account) $FMV

[Margaret CPA in OH]

>>The Audi is a distribution to this S-corp SH, fully depreciated, right?<<

Right... but it is a sale of an asset at FMV reported on form 4797 with gain passed to the shareholder on form 1120S-k1 to pay taxes.

Books:

Debit- Accum Depr $ COST

Credit- Property Cost-Vehicle $ COST

Debit- Due from Shareholder or Property Distribution account $FMV

Credit- Gain on Sale of Assets (income account) $FMV

Hmmm, I sort of see this but not completely. If the corp distributed the auto to the shareholder, how can the corp be selling it and reporting it as a corp sale? Or is this just the way these things are reported? It's a first for me. Thanks so much for replying; it's appreciated.

[RoyDaleOne]

MONEY OR PROPERTY DISTRIBUTIONS

Most distributions are in money, but they may also be in stock or other

property. For this purpose, "property" generally does not include stock in

the corporation or rights to acquire this stock. However, see

DISTRIBUTIONS OF STOCK OR STOCK RIGHTS, later.

A corporation generally does not recognize a gain or loss on the

distributions covered by the rules in this section. However, see GAIN FROM

PROPERTY DISTRIBUTIONS, later.

AMOUNT DISTRIBUTED. The amount of a distribution is generally the amount

of any money paid to the shareholder plus the fair market value (FMV) of

any property transferred to the shareholder. However, this amount is

reduced (but not below zero) by the following liabilities.

* Any liability of the corporation the shareholder assumes in

connection with the distribution.

* Any liability to which the property is subject immediately before,

and immediately after, the distribution.

The FMV of any property distributed to a shareholder becomes the

shareholder's basis in that property.

GAIN FROM PROPERTY DISTRIBUTIONS. A corporation will recognize a gain on

the distribution of property to a shareholder if the FMV of the property

is more than its adjusted basis. This is generally the same treatment the

corporation would receive if the property were sold. However, for this

purpose, the FMV of the property is the greater of the following amounts.

* The actual FMV.

* The amount of any liabilities the shareholder assumed in connection

with the distribution of the property.

If the property was depreciable or amortizable, the corporation may

have to treat all or part of the gain as ordinary income from depreciation

recapture. For more information on depreciation recapture and the sale of

business property, see Publication 544.

Yes it is treated as sale.

[OldJack]

>>how can the corp be selling it and reporting it as a corp sale?<<

No free lunch and no bargain untaxed distribution of property. If the S-corp wants to give me the auto at zero cost they could get away without reporting a gain. yeah sure.. you know they would do that for a stranger? So if they would not do it for a stranger what makes you think they could get away with doing it for the owner?