sale of non-depreciating business property

[CoreyC]

I'm a self-employed Photographer with a single-member LLC and during the lockdown period of 2020 I sold some camera equipment I rarely used (lenses and lighting equipment) to help pay the bills.  This equipment was purchased outright in 2019 and earlier and was not previously reported as a depreciable asset.  As expected, I took a loss on each item sold compared to the original purchase price.  So two questions - do I need to report the proceeds from the sales as business income and if so where do I enter it?

[LudwigVan_fan]

First, a couple of questions.

Are you treating the single member LLC as a Sch C or corporation?

For the items sold; did you ever depreciate the camera equipment or "expense" them for tax purposes?

Did you always treat the sold items as personal for tax purposes?

If the answer is a Sch C and you never treated the sold items as business property; if you sold them at a loss, then you don't have to report the sales and you don't get to deduct the loss.

If you treated them as business assets; then would have to report the sale on F4797, and deduct the basis of the items.  If you do that, basis for selling purposes would be cost less depreciation allowed OR ALLOWABLE.  That may or may not result in a loss, near break even, or a small gain.

Instructions for form 4797

https://www.irs.gov/pub/irs-pdf/i4797.pdf

See also Form 8949 and its instructions

[CoreyC]

@LudwigVan_fan  Thanks for the quick reply, I'll do my best to answer the questions.

As a single member LLC the IRS considers it to be a "disregarded entity".  I'm not sure if that answers your question, but it's just a standard LLC that I pay taxes on with my personal taxes, nothing fancy.

None of the equipment was ever depreciated, however on the tax returns for the years purchased they were grouped together in the Office Expenses section of the interview as Photography Equipment.

I don't understand the question "Did you always treat the sold items as personal for tax purposes?".  Could you elaborate?

From what you said I'm thinking I don't have to report the proceeds of the sale, but if you could confirm that'd be appreciated.  Thanks!

[Carl]

If you expensed the items under Safe Harbor de-Minimus (which allows you to claim what you paid for them as a business expense, instead of depreciating them as a business asset) then you've already deducted what you paid for them originally, as a business expense in whatever tax year you purchased the items.

Therefore, whatever price you got for the items when you sold them, would be reported as normal business income.

The depreciation factor will come into play, only if you did "not" elect the Safe Harbor de-Minimus option when you expensed them in the year you purchased them.

[Rick19744]

Let's summarize your response and @LudwigVan_fan reply:

• The question was asked if the equipment sold was personal or business.  You answered this by indicating the equipment was "grouped" with your business items.  So the equipment sold was business related.
• Next, it was pointed out that for tax purposes, the rule for determining gain or loss on business assets with depreciation is that the basis of the asset includes depreciation allowed or allowable.  Essentially this means, that if the business asset was a depreciable asset and you did not take depreciation as allowed, then the IRS will still deem that you took depreciation (allowable).  This means that the assets you sold most likely have no basis and as a result, all proceeds received will be gain.  Additionally, when reporting this sale on form 4797, all income from the sale will be recaptured as ordinary income to the extent of any depreciation that would have been allowed had you depreciated the assets.
• Quick example: bought in 2019 for $5,500.  Depreciation allowed could have been the entire amount if you chose bonus depreciation or it could have been $786 had you elected out of bonus depreciation; assuming 7 year property half year convention.  Based on the limited facts, you most likely did not elect out of taking bonus depreciation so the IRS will take the position you took the full bonus.  So if your proceeds were $5,500 or less, the entire gain will be ordinary.