Recapture of depreciation on totaled car? - TurboTax Home & Business

[ks52]

IRS Pub 463 page 35 seems to say that if the insurance payment for a totaled car (used for business) is less than the adjusted cost basis, there is no gain and no recapture of depreciation.  In my case, the car was used 30% for business over 8 years.  30% of the insurance payment is less than 30% of the original price of the car.  But that "loss" is less than the the cumulative depreciation taken.  Does the depreciation need to be subtracted from 30% of the original price and then any resulting gain would require an equivalent recapture of depreciation?

[Mike9241 · Accepted solution]

you missed the note. that casualty/theft section has not applied since 1/1/2018 

Note. Like-kind exchanges completed after December 31, 2017, are generally limited to exchanges of real property not held primarily for sale.
Casualty or theft. For a casualty or theft, a gain results
when you receive insurance or other reimbursement that
is more than your adjusted basis in your car. If you then
spend all of the proceeds to acquire replacement property
(a new car or repairs to the old car) within a specified pe
riod of time, you don’t recognize any gain. Your basis in
the replacement property is its cost minus any gain that
isn’t recognized. 

you split the original cost 30/70

you split the proceeds 30/70

from the 30% business portion of its cost, you subtract the depreciation allowed or allowable. this is your adjusted basis for computing gain or loss on the business portion.  Loss is ordinary. Gain is ordinary to the extent of depreciation. Any excess is capital gain.

if 70% of the proceeds is more than 70% of original cost you have a capital gain. a loss is not deductible. 

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I don't know if Turbotax properly handles this split reporting. 

[ks52]

Thank you!  I finally found the bell in the right hand corner above and then your reply.  The email I received (from TurboTax telling me I had a reply from an expert) included a link to log in to my TurboTax account.  There were no messages there.

If I understand you correctly, I have to calculate 30% of my cost basis, subtract the cumulative depreciation taken, and then compare it to 30% of the insurance payment.  That does produce a gain equal to about 54% of my depreciation, so that 54% is a taxable recapture at my ordinary tax bracket.  And there is no unrecognized gain to carryforward to my new car.

The TurboTax software can't handle this.  The software gives a warning that it can't accommodate it when the business use % varied over the years.  Unfortunately, it gives no hint of what to do - they really need to update the software to give the option specifically for totaled cars.

After many hours of research (including some time with live experts, who tried but weren't sure how to deal with the software), I finally found my solution.  And you confirmed my question regarding how the IRS determines the taxable amount.  In the Vehicle Expense Section under Business Expenses, I reported the car's date of disposition and input zeros for the basis and proceeds which gave me no taxable income.  Then I went to the Sale of Business Property Section to input the correct 30% basis, 30% proceeds and total depreciation, which gave me the correct amount of taxable income.

Hopefully others in the same situation will find this thread.