Recapture of excess depreication?

[ILLMAS]

TP bought a new car for business, last year she used her car about 85% of the time and we took 50% special allowance, this year she only used her car for 20% business and ATX triggered a recapture of excess depreciation, is this correct? If you take the special allowance in one year, you need to have about the same business use in order avoid the recapture?

Thanks

[Pacun]

Correct, recapure is triggered when business use falls below 50%.

[mcb39]

It makes sense that that would be the case since you have already taken accelerated depreciation. One of those things that you don't think of when you put the gravy on the potatoes. I try to never take that extra stuff unless the client really needs the deduction. Especially now days with so many businesses failing on their own without having to pay back recapture.

[Kea]

I have a similar situation, but I'm using TRX software. It is not calculting the recapture automatically.

My question is where to report it. Should it get reported on Form 4797, Part IV (line 33a)? I know this is Special Allowance and not Section 179 but it's the only place I see to show depreciation recapture.

Or, does it just go directly on the Sch C line 6 without any indication of what it is?

Or, something completely different?

Thanks

[jklcpa]

You would used Form 4797, lines 33 through 35, col B. Those lines show the originai depreciation, the amount recalculated using the reduced percentage, and the recapture amount. From there, the amount on line 35 is to be reported on Schedule C, line 6. Does TRX have a worksheet for line 6? ATX does and the amount from the 4797 would be carried to that worksheet and from there, to line 6 of the Sch C.

[Kea]

Thanks jklcpa. I guess I should clarify that in my case the recapture is on a cell phone not a car. So I don't think I would use column b for 280F( b ) ( 2 ) for luxury autos. So, would column ( a ) be correct even though it isn't exactly Section 179?

And, unfortunately, TRX doesn't have a link to line 6 on the Sch C. It just gives me a place to type in a figure if it doesn't carry from somewhere else. In this case it does automatically carry from line 35 of the 4797.

Thanks so much!

[jklcpa]

Good question! I created a 2010 dummy return with your fact pattern and rolled it forward. In the 2011 return ATX is reducing the recovery basis using the current year percentage of business as I'd expect. From there the current year depreciation expense is being adjusted as if the reduced business use percentage was used for both years. The reduced depreciation amount is shown on Sch C, with nothing on line 6, and not reported on 4797. In other words, my dummy Schedule C is reporting the depreciation expense net of the recapture.

Judy

[Randall]

I try to caution clients on vehicles. Try to go with SL if they will agree.

[Kea]

Judy --

TRX is doing the same thing. I still think the recapture is appropriate since the usage will probably never get back to the 50% already deducted. Client told me she "retired" the old phone when she got a new one, but that she didn't sell it. (I believe she still has it and passed down to a family member, but I'm verifying that part.)

In my brief glance at TaxBook I haven't seen anything about the recapture rules on Special Allowance like there is on Section 179. I'll do more digging this afternoon.

An outright sale would be so much easier to handle.

Randal - I actually advise most of my clients that Standard Mileage is better than Actual Costs. I only have 2 clients that use their vehicles for business enough to make actual costs work better. But, those are the folks that keep their business trucks several years, so I've never considered suggesting SL for them.

Thanks!

[Kea]

OK -- turns out phone was recycled. Not really sure where this lands. I guess as a "sale" at the 80% cost (original basis - 20% for 1 year depreciation)? She used it for right at one year. And of course, adjusting the whole thing for % business use in that one year.

And, just for future knowledge, want to find out if recapture rules apply the same for special allowance as for Section 179. I've got some reading to do.

[jainen]

>>if recapture rules apply the same for special allowance as for Section 179<<

Not exactly the same. Section 179 recapture is triggered when usage falls to 50% or less, whether sold or not. Special depreciation is like MACRS in that depreciation is only recaptured on disposition. (For this purpose, conversion to personal use is not treated as a disposition, so recapture is delayed.)

In the original post, MAS was asking about a car. Listed property triggers recapture of ANY excess depreciation when usage falls to 50% or less.

[Kea]

Thanks!

In this case, a cell phone (no longer listed property) was recycled. Not moved to personal use (like I first "assumed" - dangerously). It does become a disposition - but at what "selling price"? Am I correct is using 1year SL depreciation to calculate a "selling price"?

OR, do I show "selling price" as remaining basis so that there is no gain or loss?

[jainen]

>>"selling price" as remaining basis<<

Unless she got some kind of credit or trade-in value, she realized zero from the disposition. That would probably mean a loss on the business percentage of basis. The basis would be reduced by straightline depreciation, and the Section 179 would still be recaptured accordingly.

[Kea]

Thank you so much!