Questions about car rental business

[sockfight]

I had an extra car at the end of last year. It used to be my primary personal car, but I got a new one. Rather than sell the extra car, I signed a contract with a company. They operate out of airports, and their business model is people drop their cars off and they rent them out to other people. The contract I signed put the car at their disposal for a year. I was to be paid a daily rate any day they actually rented the car out. The contract also stipulated a monthly minimum payment and various bonuses. I have two questions:

First: When I began this contract last year, I determined that this represented putting the car 100% in service to my business (I formed an LLC). The car was no longer parked at the house and no longer available whatsoever for personal use. So I took the car's fair market value and begin depreciating the car as an asset (5Y SL, I believe). Fast forward to this summer. After making money for about six months, the car was involved in an incident and declared a total loss. Because of the car shortage, the market value of the car actually increased and the insurance payout was higher than the fair market value at the time I placed the car in service. How does this unusual situation - an asset that appreciated rather than depreciated - affect my taxes? Do I have to pay tax on the excess value? Does this get reported as a disposition of asset? Does the fact that it was not always in service to the business matter?

Second: Would the income this enterprise generated be considered passive income? 

Thank you!

[Critter-3]

The rental should be reported on the Sch C and the car listed as an asset  and due to the accident the car was disposed of (technically you sold it to the insurance company) for a price so just indicate the auto was sold in the program and follow the screen instructions.   Since the car's value at the time of sale is more than the adjusted cost basis then you will have a gain on the form 4797. 

[sockfight]

Thank you, that makes sense. What about the question as to whether this was passive income? For context, my LLC encompasses a more general business (running a blog on money-saving/money-making ideas, such as this one). I'm trying to determine whether the profit from this 1) is subject to SE tax; 2) would enable me to take a healthcare premium and/or IRA deduction against it.

[Mike9241]

passive has nothing to do with SE tax. the rental of personal property (your auto) is subject to SE tax (that's why it goes on Schedule C rather than Schedule E). The rental is a passive activity.

Your health insurance premiums are tax deductible if you have a net profit reported on Schedule C or F. You are also eligible if you’re a general partner, a limited partner receiving guaranteed payments, or a shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2.  you're also IRA eligible. but the same should be true if you have income from blogging.

[sockfight]

I'm not 100% sure because it says in the Schedule C instructions: "Rental of personal property. Generally, a rental activity (such as long-term equipment leasing) is a passive activity even if you materially participated in the activity. However, if you met any of the five exceptions listed under Rental Activities in the Instructions for Form 8582, the rental of the property is not treated as a rental activity and the material participation rules explained earlier apply."

(I'm aware that rental of real estate is Sch E)

Of course, I want the answer to be it's not passive income 🙂

[sockfight]

Maybe I'm over-complicating things. I will have a net profit on Schedule C, and is it the case this is treated as earned income (subject to SE tax but also eligible for IRA or healthcare premium deduction against it)? I've been confused why Sch C makes comments about passive income from rental activity, but is that just to impose a loss limitation?

[Mike9241]

"I've been confused why Sch C makes comments about passive income from rental activity, but is that just to impose a loss limitation?" yes it is. but it gets complicated when there are multiple passive activities. other than with Publicly Traded Partnerships, the profit from one passive activity can be used to offset the loss from another.  

[AmeliesUncle]

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@sockfight wrote:

I had an extra car at the end of last year. It used to be my primary personal car ... the market value of the car actually increased and the insurance payout was higher than the fair market value at the time I placed the car in service. ... Do I have to pay tax on the excess value?

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Probably not.  It would only be a gain if the excess value was higher than your purchase price.  TurboTax does not handle this situation.

[sockfight]

I purchased the car for personal use at about $13k. Later, I placed the car 100% in service to the business (no more personal use) and determined the fair market value was $12k. I began a depreciation schedule at this price. Finally, when the car was totaled, insurance paid $17k. Is this a gain of $5k? $4k? Or something else? I had assumed $5k based on the earlier discussion...

[Critter-3]

12K basis  - depreciation taken =  adjusted basis

sold car to insurance co for 17K  -  adjusted basis =  taxable gain reported on a form 4797

[AmeliesUncle]

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@sockfight wrote:

I purchased the car for personal use at about $13k. Later, I placed the car 100% in service to the business (no more personal use) and determined the fair market value was $12k. I began a depreciation schedule at this price. Finally, when the car was totaled, insurance paid $17k. Is this a gain of $5k? $4k? Or something else? I had assumed $5k based on the earlier discussion...

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Your Basis for a gain starts at $13k.  BUT as Critter pointed out that Basis is reduced for depreciation that you claimed (or could have claimed).

https://www.irs.gov/publications/p551#en_US_201812_publink[phone number removed]

[sockfight]

Critter said the basis starts at $12k not $13k. $12k is what I would have expected.

[Critter-3]

When you placed the asset into service you had to use the FMV  as of the date of conversion and not the original cost ... so since you used it personally for a time before you converted it you cannot use the original purchase price. 

[AmeliesUncle]

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@Critter-3 wrote:

When you placed the asset into service you had to use the FMV  as of the date of conversion and not the original cost ... so since you used it personally for a time before you converted it you cannot use the original purchase price. 

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No.  Basis for a GAIN is the actual Adjusted Cost Basis.  Basis for a loss (and for depreciation) is the lower of Adjusted Cost Basis or the Adjusted FMV Basis.  But the calculation for a GAIN uses the actual COST (plus and minus any adjustments, such as depreciation).

https://www.irs.gov/publications/p551#en_US_201812_publink[phone number removed]