Automobile depreciation recapture

[manager5923]

All the business assets of an S corp were sold except a vehicle which was fully depreciated. The S Corp is looking for new opportunities but is relatively inactive for the time being.  What if anything needs to be reported to the irs regarding the vehicle?

[Mike9241]

if you're converting the vehicle to personal use, the proper treatment would be to treat it as sold to you for Fair Market Value. since its fully depreciated the S-corp will report this as section 1245 recapture  - ordinary income.  this will allow you to close down the S-Corp and file a final return.

if you don't do the sales route, technically if you using the vehicle for personal purposes.  the IRS actually requires that the value of the personal use be included on your w-2. this has been true for decades but probably many ignore this rule. thus not only would you have to file a w-2 and w3 but also continue filing 941s form 940 and any state payroll tax returns. 

here's the link

https://www.eidebailly.com/insights/articles/2018/1/personal-use-of-company-vehicle 

[manager5923]

I have another S corp that is using the vehicle for business purposes. I suppose if I sold it from one to the other, I'd have to declare the income from the sale on one and depreciate the purchase on the other.  But what if the vehicle was rented to the other company and that income was declared by the one and expensed by the other.  That seems like it would have a lesser tax consequence, or at least defer the tax to a later date.

[Mike9241]

you may want to consult a lawyer. maybe the way to go is to merge the two S-corps, don't know what's in B so don't know if this would be appropriate. there is a thing that many taxpayers miss when they lease a vehicle for business purposes. it's the lease vehicle inclusion that would make a portion of the lease payments not deductible while all lease income would be taxable. there is the question about the need for you to take a salary from the first S-Corp.  

 read leasing a car starting on page 22 and lease vehicle inclusion on page 3

https://www.irs.gov/pub/irs-pdf/p463.pdf 

or consult a tax pro who would be able to discuss all options including the pros and cons of each. 

[manager5923]

I think I'll chose door #1, convert to personal use and close the company.  

I read in a post which had similar circumstances, except an individual owned the vehicle that was being converted to personal use, and he was advised that he only had to declare that when the vehicle was sold or traded in.  Do you agree?

[Rick19744]

Your facts are not the same.  In your facts, the auto is owned by the S corporation and not an individual.

The S corporation will be making a liquidating distribution of the vehicle; and possibly cash, etc.

Any liquidating distributions will not be reflected on the final K-1(s).  Liquidating distributions need to be reported on form 1099-DIV.

As was noted by @Mike9241 , the liquidating distribution of the vehicle will be as if it was sold at FMV, gain reported at the S corp level which most likely will all be Section 1245 recapture.

Your basis in the vehicle is now the FMV as reported on form 1099-DIV.

You will then need to update your basis in the S corporation and determine your overall gain or loss on this investment.  This will be reported on your individual tax return.

[manager5923]

Rick, yes, I understand the facts are different. I was asking to know the difference in the way the conversion to personal use is handled as an individual verses an S corp for future reference.  

In my current case, I'm working on my 1120-S  2021 return, and would like it to be its final return. I haven't ever closed an S-corp so I'm not familiar with the rules.  I can't find anything in the IRS instructions regarding that or liquidation distributions, can you send me a link or something.  Thanks

[Rick19744]

An S corporation is essentially a C corporation that has made an election to be taxed as an S corporation.

There are certain code sections that apply specifically to S corporations.

However, liquidations are not one of them.

Liquidating distributions are governed by IRC Section 336.

Here is some discussion from an IRS directive to field agents:

Upon an S corporation’s liquidation, IRC 336(a) requires the recognition of gain or loss to the corporation as if all the distributed assets were sold at their fair market value. If the S  Audit Tool - S Corporation Built-in corporation sells all its assets to a third party as part of a plan of liquidation, then the gain or Gains & Other Taxes Issue Guide loss is recognized by the corporation irrespective of any plan of liquidation and just cash remains for the IRC 336(a) gain computation. However if the assets are distributed to the shareholders as part of the liquidation then the gain or loss must be recognized based upon the FMV of the assets distributed.

And then the instructions to form 1099-DIV:

https://www.irs.gov/pub/irs-pdf/i1099div.pdf