If a schedule C business is closed at 2nd year, do I have to pay back the expenses deducted on the third year?

[jenny-lee635]

For example, computer equipment, cell phone, etc. At the 2nd year, I did not dispose the lap top and cell phone.  How do I report if asked about disposition of those equipment.  Thank you very much.  It's a small business.

[Mike9241]

what was the method of disposal? that determines how to report the disposal. if sold, then you report the sale on the asset worksheet. if converted to personal use or given away to a friend or relative, they're deemed sold at Fair Market Value and you would also report this the same way.  

[AmeliesUncle]

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@Mike9241 wrote:

if converted to personal use ..., they're deemed sold at Fair Market Value and you would also report this the same way.  

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No, that does not apply for a Schedule C business.  Converting to personal use just stops any depreciation, but no gain or loss would be calculated.

[ColeenD3]

If, at some point you sell the asset, you must include the depreciation as an basis adjustment, which will give you a larger gain.

[jenny-lee635]

Took 179 deduction in the first year.  No more deduction in the second year.  If second year is also a loss, is it better to close business at the end of 2nd year or 3rd year. 

If converting laptop, cell phone for personal use after business closing , how to report?  Is it a business gain?

Thank you

[jenny-lee635]

Laptop, cell phone, etc.  took 179 deduction in the first year.  No depreciation in the second year.  How to report it if converting to personal use.

Thank you! Also where to report schedule C carry over loss in the 2nd year?

[jenny-lee635]

Hi Tax expert,

I am new to schedule C.  Can you give me an example of what you said?  I did not quite get it.

Thank you very much.

[ColeenD3]

When you no longer use an asset in business, the two most likely outcomes are sale or conversion to personal use. Since you took a Section 179 expense, meaning you took the entire asset's useful life in one year rather than spreading it out over a number of years, you have to recapture the depreciation. Recapture

If in 2019 you had a five year asset that cost $1000, you would have been entitled to a deduction of $200 the first year. Since you would have taken the entire $1,000, you took $800 of depreciation you were not entitled to. You must include the $800 as income.

[jenny-lee635]

Dear TaxExpert,

Thank you for your reply.  If the business was closed at the end of the 2020, should there be another $200 for 2020?  Do you recapture in 2020 or 2021?

Does this way work?  Take $200 depreciation deduction for 2019 and 2020 for total $400.  Then don't have to recapture in 2021?

Another unrelated question, if a person did not receive the two stimulus payments in 2020, that person  can claim on the 2020 tax return(Recovery rebate credit.  That person qualifies.)  Is there any risk of losing that credit by filing an extension and filing the 2020 tax in October?  Just want to make sure. 

Thank you for your time  in advance

[ThomasM125 · Accepted solution]

@jenny-lee635 You mentioned that you took section 179 depreciation on the assets, but also said you had a loss on your business. The section 179 depreciation cannot be used in a year where you have a loss before the depreciation is deducted. So, it may be that you didn't deduct any depreciation on the assets, in which case you wouldn't need to recapture any of the depreciation in 2020.

You would be entitled to depreciation in 2020 up until the date you sold the business. If you work through the questions in TurboTax regarding the disposition of the business, the program should report any income associated with the recapture of depreciation.

You will be entitled to your stimulus checks even if you file your tax return in October.

[jenny-lee635]

Thank you very much for your help.