Can a fully-depreciated asset be placed into service in a new entity without a sale transfer?

[amend20201]

I own a vehicle and have elected to take depreciation on it in my sole proprietorship. I intend to close the sole proprietorship, and continue personal use of the vehicle.

If I create a new single-member LLC, can I place the same vehicle into service in the new entity and start taking depreciation on it?

[Mike9241]

there is no sale when you close the sole proprietorship. already having a zero tax basis you can't depreciate it. 

[Opus 17]

The basis of depreciation for the asset when placed in service with the new business is either the fair market value at the time, or the adjusted cost basis, whichever is less.  Since the property is fully depreciated, your adjusted cost basis is zero.  

[Rick19744 · Accepted solution]

@Opus 17 stated:

The basis of depreciation for the asset when placed in service with the new business is either the fair market value at the time, or the adjusted cost basis, whichever is less.

This is not correct, as based on these facts, there was business use and prior depreciation taken.

The basis of contributed property, in this example, is the same as it is in the hands of the contributor; adjusted basis.

There will be absolutely no change in the basis of property contributed to a single-member LLC, if the single member LLC is disregarded.  As a result of being disregarded, it is as if the contributor contributed property to themself; there is no entity for federal income tax.

Based on your facts, as noted by @Mike9241 , since it is already fully depreciated, you will have zero adjusted tax basis.

[Carl]

If I create a new single-member LLC, can I place the same vehicle into service in the new entity and start taking depreciation on it?

No. It was fully depreciated in a prior sole proprietor business that you owned and closed without disposing of the vehicle in a fully taxable transaction. With a cost basis of ZERO in the new single member LLC, there is nothing to depreciate.

However, unless there is something I'm not aware of, you can still take the per-mile deduction for each business mile driven with the vehicle. You'll need to keep finely detailed mileage records to support your claim, should you ever be audited.

[Mike9241]

@amend20201 if you at any time used the actual expense method which it seems you did, you can not switch to the standard mileage method. I don't think it matters that the vehicle will be used in a new business. 

[tagteam]

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@Carl wrote:

.....you can still take the per-mile deduction for each business mile driven with the vehicle. 

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I don't think that will work - See @Mike9241's post re using actual expenses (and depreciation deductions).

The standard mileage rate includes a depreciation component and this vehicle has an adjusted basis of $0 as a result of previous depreciation deductions.

[Carl]

@tagteam I've never been able to find anything that says you can't take the per-mile deduction after the vehicle is fully depreciated. I used the per-mile on my truck for about 15 years, and there's no question I fully depreciated it well before I sold the truck. Now when I sold it, I did use a cost basis of $0 since there was no doubt it was already fully depreciated. But even after fully depreciating it with the per-mile deduction, I found nothing saying I could not continue to use the full amount per-mile with the per-mile deduction.

[tagteam]

@Carl 

See https://www.irs.gov/taxtopics/tc510

Standard Mileage Rate

To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

[Also note that if you choose the standard mileage rate in the first year, you can continue to use it even if the depreciation component results in the accumulated depreciation going below the basis of the vehicle]

[Carl]

But it is the first year being used in the new business. So the per-mile deduction can still be used.