Depreciation recapture

[kathyv]

I closed my business (sole proprietorship) on 3/31/22.  I took the section 179 depreciation ($11,656) for my 2019 vehicle used for business in the year I purchased the car (3/2019) and depreciated based on the calculation Turbo tax figured for both 2020 ($1037) and 2021($658) for a total depreciation of $13,351.   How do I determine if I owe depreciation recapture?  If I use straight line depreciation, the useful life is 5 years, but the car's resale value after only 5 years is much higher than salvage cost.  Do I use the resale value to reduce the cost basis before I calculate the straight line depreciation for the 5 years?

[AmeliesUncle]

No, resale value and salvage cost has nothing to do it.

You need to calculate things using Straight Line, using the original Basis for depreciation.

[kathyv]

ok - so then the calculation would be as follows:

Cost basis $29,360 purchased 3/2019 - straight line depreciation would be $5872 per year for 5 years.

Through 2021 I've taken depreciation totaling $13,351.  Using straight line calculation through 2021 depreciation would be $17,616 so no recapture due, correct?

[AmeliesUncle]

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@kathyv wrot

Cost basis $29,360 purchased 3/2019 - straight line depreciation would be $5872 per year for 5 years.

Through 2021 I've taken depreciation totaling $13,351.  

Using straight line calculation through 2021 depreciation would be $17,616 so no recapture due, correct?

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Does the $13,351 include the $11,656?

Was it 100% business use?  It not, that needs to be factored in.  Based on your numbers, that does not seem to be the case.

The $17,616 would be assuming 100% business use.   Is that the case?

[Mike9241]

also, you don't get a full year's depreciation the first year or last year used in business.  there are certain conventions like mid-year (1/2 year in the year acquired and dispose) and midquarter if 40% or more of most depreciable assets are acquired from 10/1/ through 12/31 of a calendar tear. 

[kathyv]

Yes, the $13,351 includes the $11, 656.  The vehicle was not used 100% for business.  I'm assuming I apply the percentage of business use to the straight line depreciation before calculating the difference between what was taken and straight line.  Also, do I need to apply 1/2 year convention to both the acquisition year and the disposal year, and is that calculation simply 50% of the straight line amount for those years?

[AmeliesUncle]

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@kathyv wrote:

Yes, the $13,351 includes the $11, 656.  

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That doesn't make sense.  So you've only claimed $1695 over 2020 and 2021?  That would have meant that the vehicle was less than 50% in 2020, which in turn means that you should have done Section 179 recapture in 2020.

I suspect you may want to go to a tax professional to review what you have done for the past few years.

[kathyv]

The business usage did not go below 50% in any year I had the vehicle.  2019 was 64.4%, 2020 was 50.74% and 2021 was 51.38% per the depreciation schedule with my returns which were all done using Turbo Tax.

[AmeliesUncle]

Ah, I had temporarily forgotten that because TurboTax uses the mathematical way of depreciation, that can result in some pretty weird results when the business percentage varies.

However, I still stand my my comment that you should have a good tax professional look at things.