Recognizing Cost Basis of Contributed Assets in an LLC and Calculating Corresponding Depreciation

[ndc24075]

As the sole owner of my LLC, I am planning to contribute fixed assets (mostly computers and accessory) to the company and I need to calculate the depreciation of those assets. I am wondering if a simple residual value with a reasonable duration or market value with reference from eBay or Amazon would be enough to establish the value of the assets, or if I should have an accountant evaluate them.

Additionally, I noticed that TurboTax has default durations for different types of assets, for example, 5 years for computer equipment. I'm wondering if these default durations are standard or if they can be adjusted based on the specific circumstances of my LLC. Any insights or advice on these topics would be greatly appreciated. Thank you in advance for your help!

[JosephS1]

Yes, what you propose to do with the valuation of your contributed assets is reasonable and acceptable.  I do suggest if you can, printing out the pages from which you get the valuations for verification purposes.

You can choose a different method for depreciation than the default.  You can override the years based on the true estimated useful life if you know it.  If you do not know the true estimated life I do suggest you keep the default methods and years.  You listed the computer equipment as 5 year equipment and I know of many who take it as 3 year equipment. The way to take it over a different amount of years, if it is defensible to do so, is to list it with the true description but when the following screen asks the type of equipment, some will click on computer software, which has a 3-year life.  As each life is entered you be shown the amount of depreciation that will be taken.  You can also accelerate the current depreciation with what is called a Section 179 deduction or initial-year bonus depreciation.

@ndc24075 

[Carl]

I noticed that TurboTax has default durations for different types of assets, for example, 5 years for computer equipment.

Those defaults are specified by the IRS in IRS publication 946 - How to Depreciate Property. For many asset types, you can use an alternative depreciation method. Appendix B is the table of class lives and recovery periods.

The first two items refer to office furniture and computer equipment respectively. For depreciation, by default the TTX program will use GDS (MACRS). But if you want to use ADS the program can most certainly accommodate that.

[Mike9241]

overriding the lives will prevent e-filing and as to 179  it's probably not allowed from IRS pub 946

Property Acquired by Purchase
To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.
Property is not considered acquired by purchase in the following situations.
1. It is acquired by one component member of a control-led group from another component member of the same group.
2. Its basis is determined either:
a. In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or
b. Under the stepped-up basis rules for property ac-quired from a decedent.
3. It is acquired from a related person.
Related persons. Related persons are described under Related persons, earlier. However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears

basis for used equipment is the lower of cost or Fair market value when placed into use provided it has not been previously depreciated.  for example converting a sole proprietorship to a single-member LLC has no effect. you continue to depreciate as if the LLC was never created.

[ndc24075]

@Mike9241 Thanks for the insight. Could you please explain a little more about what does it mean by "it has not been previously depreciated"? Some of the computers were in personal use before it was contributed to the company. Let's say a computer has a 5-year life and I used it for 2 years before contributing it. Should I recognize the value of this asset as 3/5 of the original purchase price X? Or should I check the market value (Y) of the computer in its secondhand condition on eBay or Amazon as the contributed value? Alternatively, should the recognized value be the minimum of 3/5*X and Y, with a residual life of 2 years?

[AliciaP1]

Only assets used for business are depreciated for tax purposes, so the fact that your computers were held for personal use means they have not been previously depreciated.  The IRS has 2 allowable methods for determining the recovery period as Carl posted.  You can see Table B-1 of IRS Publication 946 How to Depreciate Property for the complete list of recovery periods by specific type of asset.  In your case, your computer equipment would have a 5-year recovery life for either depreciation method.  Typically, most small business owners use the GDS(MACRS) system for depreciation and that is why TurboTax defaults to it.

The value should be determined based on the lower of cost or market value.  You can determine Fair Market Value (FMV) by evaluating the price of buying a like asset in the open market (your example of secondhand condition on eBay or Amazon is right).  So, in your example, you would input the computer equipment at FMV with a 5 year recovery period or life.

@ndc24075

[ndc24075]

@AliciaP1 Thanks very much. It is very different than I thought. But I have one more question: When I take reference for FMV of an asset I contributed, should I look for a second hand price on eBay or a new one's price is also acceptable? The reason I asking this is because you mentioned I should treat the contributed asset as never being depreciated. It sounds like the reference should be a new one too. I would like to check whether I understand it correctly. 

One another reason is that TurboTax will suggest an asset will less than $200 to be recognized as an expense in the year instead of an asset to be depreciated. If I should take second hand price as the reference, some assets will than fall into this category and become expenses instead of assets in balance sheet.

[AliciaP1]

The rule is the lower (price) of (original) cost or FMV so that is why you would not use the value of a new one even though you would to depreciate it the full 5 years.

When TurboTax suggests listing this as an expense rather than an asset to be depreciated, it is because the FMV is less than $2,500.  This is the generally accepted threshold for capitalizing and depreciating assets.  You are allowed to handle the asset either way without raising any flags.  If you have higher income for the year, you may want to expense the whole amount.  Even if you don't, you may want to expense the whole amount just to avoid the depreciation hassle going forward.  In this case, how you treat it is your choice.

@ndc24075

[ndc24075]

@AliciaP1 Thanks for the information. I was only aware of $200 threshold for materials and supplies. Does the $2,500 threshold you mentioned refer to de minimis safe harbor? Does it also apply to contributed assets?

[AliciaP1]

No, it does not apply to contributed assets.  You are correct that it is referring to the de minimis safe harbor.

@ndc24075 

[ndc24075]

@AliciaP1 I see. But how about the $200 materials and supplies threshold? does it also not apply to contributed assets? If not, does that mean there is no particular treatment to contributed assets at all for making them as expenses?

[AliciaP1]

It depends on what the materials and supplies are for.  While they are never considered a fixed asset to be depreciated, if they are used to create products for sale they are considered an inventory asset.  If you are contributing $200 worth of office supplies, for example, you would list the expense as a deduction on your tax return. 

@ndc24075 

[ndc24075]

@AliciaP1 Thanks for your patience in explaining this. The assets I contributed that are below $200 value are mostly accessories such as HDMI cables, hard-drives, monitors. They are more like for office use rather than for product. Do they satisfy the materials and supplies definition?

[AliciaP1]

Yes, those miscellaneous accessories would qualify to be expensed for 2022.

And you are very welcome!

@ndc24075