My wife works part-time as a fitness instructor. In 2014, she bought a franchise from a retiring instructor and last year she sold the franchise for the same price that she paid in 2014. The buyer paid just over half of the amount last year and is paying the rest over time as the business income allows. She reported what she paid, along with normal subcontracting payments on a 1099 as one amount.
So, question #1: I would expect that selling a franchise like this, with neither loss nor gain would not be a tax event. If that's the case, then the amount reported in the 1099 should be reduced to just the subcontracting payments. Is this true? If so, how do I report this in TurboTax? If not, do I just report the whole sum as income?
Question #2: While she owned the franchise, we deducted standard mileage for her car when she drove from her primary place of business (our home) to the center she rented to teach fitness classes and back. Now, she no longer rents the center and I don't think we can claim any mileage for her continued subcontracted teaching so I need to "remove the vehicle for personal use". But TurboTax claims it can't handle the necessary recapture calculations (even though I've used TurboTax for all these years). How do I proceed in this situation?
You still need to report the sale of the business on Form 4797, even though there is no gain. The return will show that there was no gain or loss.
Depreciation adjustment when you used the standard mileage rate. If you used the standard mileage rate for the business use of your car, depreciation was included in that rate. The rate of depreciation that was allowed in the standard mileage rate is shown in the Rate of Depreciation Allowed in Standard Mileage Rate table, later. You must reduce your basis in your car (but not below zero) by the amount of this depreciation. If your basis is reduced to zero (but not below zero) through the use of the standard mileage rate, and you continue to use your car for business, no adjustment (reduction) to the standard mileage rate is necessary. Use the full standard mileage rate (58 cents (0.58) per mile for 2019) for business miles driven.
Rate of Depreciation Allowed in Standard Mileage Rate Year(s) Depreciation Rate per Mile 2019 $0.26 2017–2018 0.25 2015–2016 0.24 2014 0.22 2012–2013 0.23 2011 0.22 2010 0.23 2008–2009 0.21 2007 0.19 2005–2006 0.17 2003–2004 0.16 2001–2002 0.15 2000 0.14 Example. In 2014, you bought and placed in service a car for exclusive use in your business. The car cost $25,500. From 2014 through 2019, you used the standard mileage rate to figure your car expense deduction. You drove your car 14,100 miles in 2014, 16,300 miles in 2015, 15,600 miles in 2016, 16,700 miles in 2016, 15,100 miles in 2018, and 14,900 miles in 2019. The depreciation portion of your car expense deduction is figured as follows. Year Miles x Rate Depreciation 2014 14,100 × $0.22 $3,102 2015 16,300 × 0.24 3,912 2016 15,600 × 0.24 3,744 2017 16,700 × 0.25 4,175 2018 15,100 × 0.25 3,775 2019 14,900 × 0.26 3,874 Total depreciation $22,582 At the end of 2019, your adjusted basis in the car is $2,918 ($25,500 − $22,582)
I just looked at Form 4797 and it seems to be for property, would a franchise with no physical property changing hands still be reported on this form?
I'll have to look back at previous years taxes and try to figure out the car situation, but this particular car was put into service in 2017, the previous partial business-use vehicle which was put into service in 2014 was totaled due to an accident.
Interestingly, looking back at our 2017 tax forms, the only related items included by TurboTax was an additional page that showed the dates of being put into service and the 2017 mileage for both vehicles and a Form 8824, which, now that I look at the numbers, is probably incorrect and brings up another question. The numbers I have on the 8824 are the basis of the totaled car and what looks like the price of the new car. What I would expect to see are the basis of the totaled car and the insurance payout for the totaled car, so that should have been a pretty big loss. I'm not sure that the new car would even come into play here. So, the question is: how would you normally report the loss and replacement of a partial-business-use vehicle while receiving a cash payout from insurance.
Edit: While looking at other forum posts, I see some confusion about whether or not milage can be deducted for independent subcontractors. I am also confused, but maybe I don't need to convert this vehicle to personal use of we can still deduct mileage. Here's our current situation (after the franchise sale): my wife teaches fitness classes part-time for franchise owners, but she will still be maintaining a home office as her primary place of business. The home office was set up by a tax professional years ago when she was in the same situation she is now (i.e. a subcontractor) and has not changed. As for the mileage deduction, the tax instructions were pretty clear that the deduction was allowed when she was a franchise owner as one of the examples was someone traveling from their "primary place of business" to a "place they rented" to do business and back. But now she travels from her "primary place of business" to wherever the franchise owner rents and back. So, is the standard mileage deduction still allowed?
Yes, the business is still reported on Form 4797.
A business usually has many assets. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction. The sale of inventory results in ordinary income or loss.
The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets.
A group of assets constitutes a trade or business if either of the following applies.
- Goodwill or going concern value could under any circumstances, attach to them.
- The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code.
The residual method provides for the consideration to be reduced first by the cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposits). The consideration remaining after this reduction must be allocated among the various business assets in a certain order. To find out more about how to make the allocation among assets in proportion, refer to Publication 544, Sales and Other Dispositions of Assets.
From Pub 426
This chapter discusses expenses you can deduct for business transportation when you aren’t traveling away from home, as defined in chapter 1. These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining your car.
Transportation expenses include the ordinary and necessary costs of all of the following.
Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Tax home is defined in chapter 1.
Visiting clients or customers.
Going to a business meeting away from your regular workplace.
Getting from your home to a temporary workplace when you have one or more regular places of work. These temporary workplaces can be either within the area of your tax home or outside that area.
Transportation expenses don’t include expenses you have while traveling away from home overnight. Those expenses are travel expenses discussed in chapter 1. However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. See Car Expenses , later.
Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. However, there may be exceptions to this general rule. You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. Also, daily transportation expenses can be deducted if (1) you have one or more regular work locations away from your residence; or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance.