Question about Sale of Business Property for a vehicle

[nebirah]

I bought a new Subaru in 2012, began using it for self-employment in 2017, and got rid of the car in 2020.

(I didn't sell the Subaru or trade it in. I just signed over the title to the dealer, and my mother gifted me her used car when she bought a new one.)

From 2017-2020, I deducted the standard mileage rate on my Schedule C. My business use of the Subaru was 45% of its lifetime miles. 

In the vehicle section of my 2020 Schedule C, I checked the box that I stopped using the car, wrote the end date, and indicated I converted the car to personal use.

Then, in the section for Sale of Business Property, I entered a Sales Price of $0, calculated the Cost Basis as the FMV for the fifth year of ownership at $9,726, and for Depreciation Taken, I followed the instructions for depreciation recapture and that came to $21,777.

This didn't mess my taxes too much. Does this math and logic make sense to you?

[AmyC]

No. A couple of things strike me.

1. I am struggling with turned the title over to a dealer and sold it for zero. You did not give it to a dealer for $0. Maybe it was the trade-in for your mom's new car? 

2.Your car's value at year 5 does not matter. The value of the car when you started using it for business has been depreciated over the years. You have to take what you paid for the car originally and subtract all the deprecation taken. Ex. You paid $20,000 for a car and had depreciation of $3,800 your basis would be $16,200. 

In addition, cars depreciate to zero in 5 years of business use. So, 2017, 2018,2019, and some of 2020 means the car was close to being fully depreciated from the value used when you started using it in the business. You could not have much to claim if your sale price is in fact zero.

On the bright side, yes, selling a car for zero that is not worth much more than zero, would not have much affect on your taxes.

[nebirah]

Hi Amy,

Thanks for the responses. A few responses in kind:

1. I am struggling with turned the title over to a dealer and sold it for zero. You did not give it to a dealer for $0. Maybe it was the trade-in for your mom's new car? 

No. Mom bought a new car, the dealer gave her a $1500 discount for the FMV of my car, and I gave the dealer my car. I didn't receive the $1500 though. I received nothing, other than the gifted car. So, my sale price was $0.

2. Your car's value at year 5 does not matter. The value of the car when you started using it for business has been depreciated over the years. You have to take what you paid for the car originally and subtract all the deprecation taken. Ex. You paid $20,000 for a car and had depreciation of $3,800 your basis would be $16,200.

Why is the original purchase price more relevant than the FMV on the date when I began using it for business?

Depreciation was included during the four years of using the standard mileage deduction. I'm guessing that when you refer to "depreciation taken," it's the calculation I made with the IRS Rate of Depreciation Allowed in Standard Mileage Rate?

In addition, cars depreciate to zero in 5 years of business use. So, 2017, 2018,2019, and some of 2020 means the car was close to being fully depreciated from the value used when you started using it in the business. You could not have much to claim if your sale price is in fact zero.

On the bright side, yes, selling a car for zero that is not worth much more than zero, would not have much affect on your taxes.

Thanks.

[AmyC]

1. You received a different car in exchange for your car in a round about way. Had you signed the title over to your mom, then we could call it a gift. Signing it over to a car dealer, says you got something out of the deal. The least would be $1,500 since that was the credit allowed. Your mother sold you the new car for $1,500.Your mother effectively acted as your broker in the buy and sell process.

2. The original purchase price is your first basis in the car. What you paid to start with is the beginning point.

• A better example: Paid $60,000 for a car. Used it for a few years and then switched to business use. Car values really slipped and it was only worth $25,000 when you  switched to business use. Then depreciated it for $20,000. Your basis in the car for sale is 60,000-20,000=$40,000 basis.
• Meanwhile, using your method, you would have a much lower basis, $25,000- $20,000 = basis of $5,000, which is not correct.
• This is one of the few areas where the tax laws are in your favor to sell for a higher amount and not be taxed on it. If we sell the car for $30,000, much better to have a loss of $10,000 than a gain of $25,000.

3. Yes. Depreciation would be the total of all actual depreciation plus the correct amount from the standard mileage. If you used actual expenses, you can add the total depreciation taken each year. If you took the standard deduction, part of it was considered depreciation. Your program may have the totals if you were with us the whole time. Best to double check. For 2020, it was 27 cents per mile driven. For 2019, 26 cents per mile. For 2017 and 2018, 25 cents per mile, 2016 was 19 cents per mile. 

I hope this helps the mud to be a little less murky. This is an area where many fear to tread. I am impressed with how you have dug in.

[nebirah]

Thanks! One final question if you don't mind.

After TT transferred data from the federal return to the state return (I'm in Massachusetts), I saw that the car values (from the Sale of Business Property section) were prefilled in the state table for capital gain/loss.

Cost = the purchase price minus the depreciation

Sales Price = the same as what I entered in federal

Gain/Loss = the above sales price minus the cost

Just confirming this is correct on the state return. 

[AmeliesUncle]

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@nebirah wrote:

My business use of the Subaru was 45% of its lifetime miles. 

I followed the instructions for depreciation recapture and that came to $21,777.

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I disagree some parts of what Amy said.  And the math is more complicated.

First, you said it was 45% of its lifetime miles.  What was the average business percentage during the time you used it for business (from when you "placed it in service" to when it was given to the dealer)?

You said the depreciation was $21,777?  That is roughly 100,000 business miles.  Is that correct?

What was the original cost of the car when you bought it (for our conversation, you can just estimate if you want)?  

[AmeliesUncle]

Sorry, I am editing my first post to correct my questions about your original cost.

[nebirah]

I disagree some parts of what Amy said.  And the math is more complicated.

It made sense to me, but glad to share if you think I can get a higher tax refund:

First, you said it was 45% of its lifetime miles.  What was the average business percentage during the time you used it for business (from when you "placed it in service" to when it was given to the dealer)?

2017: 87.2% business miles

2018: 85.8% business miles

2019: 86% business miles

2020: 69.3% business miles

I reached 45% by dividing the lifetime miles (from 2012-2020) by the total business miles (2017-2020).

You said the depreciation was $21,777?  That is roughly 100,000 business miles.  Is that correct?

Correct. Business use was predominantly rideshare (Uber, etc.) and it was my predominant income; and I clocked over 84,000 business miles during those four years.

What was the original cost of the car when you bought it (for our conversation, you can just estimate if you want)?  

Approximately $24,000.

[AmeliesUncle · Accepted solution]

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@nebirah wrote:

It made sense to me, but glad to share if you think I can get a higher tax refund:

2017: 87.2% business miles

2018: 85.8% business miles

2019: 86% business miles

2020: 69.3% business miles

Approximately $24,000.

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It doesn't matter if your refund is better or not, you need to report it correctly.  😁

For simplicity, I am going to say 80% business use during that time period.  But because the totals miles vary from year to year, you would need to figure out an exact average based on total miles during that time period and business miles during that time period.

It involves a multi-step calculation:

Calculation to determine if there is a LOSS (based on FMV when converted to business use):

$9726 x 80% = $7781 business Basis

Depreciation taken $21,777

Depreciation is limited to Basis, so you use $7781.

Basis of $7781 minus depreciation of $7781 = $0 Adjusted Business Basis.

Sales price = $1500 x 80% = $1200.

Adjusted Basis of $0 and sales price of $1200, does NOT show a loss.  That means this calculation does not apply and we need to do the next calculation.

Calculation to determine if there is GAIN (which is based on purchase price):

$24,000 x 45% = $10,800 business Basis.

Depreciation = $21,777

Depreciation is limited to Basis, so you use $10,800.

Basis of $10,800 minus depreciation of $10,800 = $0 Adjusted Business Basis.

Sales price = $1500 x 45% = $675.

Adjusted Basis of $0 and sales price of $675 shows a gain, so this is the calculation you use.

So you enter $10,800 for the cost, $10,800 for the depreciation and $675 for the sale price.  It will show a $675 gain.

[nebirah]

My math teachers always told me that there might be different paths to get a solution but the answer is always the same. Fast forward into my adult life and here are @AmyC and @AmeliesUncle sharing not only different paths but also different solutions. I'm stumped which of your paths/solutions to follow. Do I need to get a third opinion, or can both of you chat so I can be less confused? Thanks!

[AmeliesUncle]

I'm right, of course.   😁

IRS Publication 551 showing that two separate calculations need to be made for gain or loss:

https://www.irs.gov/publications/p551#en_US_201812_publink1000257025

IRS Publication 554 showing the sale is treated as two separate sales, personal and business:

https://www.irs.gov/publications/p544#en_US_2019_publink100072282

[nebirah]

Hi @AmeliesUncle I grasp the logic around your scenarios. Thanks for your input into this. I have two questions:

1. I didn't sell the vehicle. I think I wrote this earlier. I signed over my title to the dealer, and the dealer discounted the FMV of the car ($1500) when selling a new car to my mother. So, I'm unclear why I should use a $1500 sale price and not a $0 sale price.

2. Why is @AmyC wrong in your opinion?

[AmeliesUncle]

1) It largely boils down to intent of the so-called "gifts".  From my perspective, you traded your car for your mom's old car.  So actually your 'sale' price could be the Fair Market Value of your mom's car at that time.

2) Amy mentions nothing about different calculations about gain versus loss (in her example, she even implied  you could take a deductible loss based on the purchase price, rather than the FMV at conversion to business use).  She mentions nothing about treating the business portion separately from the personal portion.  Both of which I gave you IRS links to support.

[AmyC]

I agree with @AmeliesUncle  I was keeping things super simple. I find it easier to start simple sometimes and then dig in. The gain/loss calculations are fabulous examples. 

[daveboyer]

I have a bit of a unique problem and I am trying to solve it.  I have talked to three Turbo Tax experts online, and none of them could help solve my problem.  I sold my old car on 8/24.  I am an independent contractor who uses a personal vehicle less than 50% of the time for business.  I have always taken the standard deduction for mileage and I have never used form 179 to depreciate the vehicle in any year.  As I am itemizing my expenses for schedule C, for my vehicle expenses, I am being asked to detail the information about the car I am taking out of service.  The dealership offered me $500 for my old car.  I used it 24.71% in 2020, meaning $124 applied as a business gain, which I entered.  Then, I get taken to a screen that asks me about "vehicle Cost".  I am assuming this was the original cost of the vehicle, when I bought it in 2008, so I entered that cost of $35000.  I then got a screen to determine basis of loss/gain.  I originally bought this car for $35000, and traded in a car that was worth $23000 (new in 2003), so I list my gain as $12000.  The next screen asks me for my prior depreciation equivalent, which is $31116.  The next screen tells me that my Gain on Sale is $124.  When I go to my main page of income and expenses, it lists the "Sale of Business Property" as $5808.  Nobody can tell me why that number is popping as income, and nobody can tell me what I am entering wrong.  Can you help?