Personal Use Items Converted To Business Use -- Understanding Fair Market Value

[PHMassie]

Nearing retirement age and with and eye on opening a Photography Business when I did retire I began to ramp up my purchase of Photography Equipment I would use for this business.  I also starting taking photographs I posted them to stock photography sites for sales.  In 2019 I opened my Photography LLC and would like to now bring all of my equipment into this business.  I understand for COST purposes I have to bring it in at what I paid for it or at Fair Market Value (FMV) whichever is lower.  I started purchasing this equipment over time starting in 2014.  TT does a good job of documenting purchase dates, and how it was used but leaves FMV up to me to input.  Some of this might be hard to determine if I can't find the exact/similar products for sale.  For example I custom built a computer in 2014 which I still use.  When I built it I over built it for the time, but knew it would last.  I also have IKEA office furniture which I can't find for sale but can see what it would cost today new.  I also have Photography equipment and accessories such as lenses, camera bodies, tripods, lighting, etc.  eBAY is hit or miss for most of these exact items so should I just guess on the FMV?

[KrisD15 · Accepted solution]

You need to make an educated guess. Have documents supporting how you came up with the value. 

The IRS is trying to stop a person from taking a personal item of little or no value, and falsely claiming a loss on it. 

For example and old car that cost 35,000 but is now worth 5,000 and the Taxpayer converts it to business use, values it at 30,000, sells it a year later for 2,500 and claims a 27,500 business loss. IRS does not like that. 

So just be reasonable. Don't convert something and then claim a large loss. 

Remember also that the value you place on the business asset is what the depreciation will be based on. Once sold or retired, you'll be liable for claiming back that amount of depreciation. 

Below is a link for more information:

IRS 946

[PHMassie]

Please tell me more about this statement or where to find it:

"Once sold or retired, you'll be liable for claiming back that amount of depreciation."  I was wondering what happens if down the road I close the business if it doesn't take off or pay for itself?

[AmyC · Accepted solution]

If you purchase an item and depreciate it over its life span, it's value goes to zero since you are getting a little money back each year. At the end of it's life, it may be no good and you throw it away. No tax consequence. Maybe, something happens and it is in great shape and you can sell it for $2,000. Then you pay taxes on the $2,000. 

Some people write off extra depreciation, with bonus depreciation or sec 179 deduction and take most or all of it the first year. They they sell it the second year or trade it in or go out of business, they already got that money early, it has to be accounted for and can increase you tax liability.

Let me help you read and learn more with all my favorite links:

Small Business and Self-Employed Tax Center - complete guide

•  About Schedule C (Form 1040), Profit or Loss from Business ...    
• Publication 535, Business Expenses
• Publication 583, Starting a Business and Keeping Records
• Self-Employment Taxes
• Form 1040-ES, Estimated Tax for Individuals
• Deducting Expenses
• Recordkeeping
• Hobby or a Business.