Tax treatment of lease forgiveness in exchange for business assets

[Tavo001]

I started by cash basis restaurant business in April of 2019 (LLC).  At the time, I signed a 3-year lease with a personal recourse clause.  When COVID hit in March of 2020, I had to go out of business.  In exchange for forgiving the rent that remained on the lease, we agreed to exchange our business assets.  The landlord kept our restaurant assets (tables, stove and other equipment) and let us out of the 3-year lease.  How should this be reported in Turbo Tax?  I presume this is not considered ordinary income since since it was recourse debt  that was forgiven and what have otherwise been allowed as a business deduction?  However, I am not sure how to account for this and treat it from a tax perspective within Turbo Tax.  Can you help?

[DaveF1006]

It depends. Are you  single member or multimember LLC?

[Tavo001]

Single member

[DaveF1006]

Yes, if you claimed depreciation in the past on the assets, you are going to need to dispose of all the assets including tables, stoves, and other equipment used. As you go through each of the assets you have depreciated in the past, you will claim prior depreciation.  For the sale price, you will assign a portion of the rent that was forgiven to each of the assets because essentially, you sold your assets for the forgiven rent. Now, if you have expensed your assets previously and not taken depreciation, you would not do anything with the assets you previously expensed. 

Let's consider the following scenario. Suppose your forgiven rent is $20,000 and let's assign values to the assets you have depreciated.

Tables      Cost $5000       Rent Forgiveness  $2000 (a portion of the $20K that was forgiven)

Stoves     Cost $10000     Rent forgiveness $10K

I am going to illustrate these two examples because I am not sure what these are and these will need to be disposed of if you have depreciated these in the past. now, I am going to  take you through step by step and how to dispose of the stove and i want you to follow these examples in disposing of the remaining assets. Remember, you are going to need to assign a portion of the rent forgiven for each asset as sale proceeds for that particular asset. In the end, all sales proceeds for all assets will equal the amount of rent that was forgiven. Here is are the steps for disposing the tables.

1. In the business section of your return, edit the section that says Here is the business information we have so far.
2. Next screen will say Your XXX business, go to Business Assets>assets to be depreciated..
3. Assuming you have assets listed, you will want to go to the Asset summary. if you have none listed, you will need to say yes to the question if you have large depreciable assets.
4. Next screen will ask if you made purchases for assets that were less than $2500.  Don't enter anything you have previously expensed in this option.
5. Next question will ask if you made improvements.  This would be strictly building improvements you may have made.
6. Next says describe this asset. The table and stove would be classified as tools, machinery, equipment, furniture.
7. Next question asks, tell us a little more. This will be office furniture, fixtures and appliances.
8. Next screen says, tell us about this asset. Here you will list tables, the original cost, and when you purchased them.  
9. The next screen says, tell us more about this purchase. Here is where you will indicate that the item was retired, the date you retired it from your service, and the date it was retired. Here is a screenshot on what this should look like.

10. Next screen asks if you took a 179 deduction, which is the full depreciation deduction in the first year you used this in your business.

11. Next screen asks your MACRS convention. If you used this asset in the last three months of your first year in business, use the mid-quarter convention.

12. Next screen will confirm your prior depreciation that should have been taken. If you have depreciated this already, confirm to see if this is your prior depreciation taken or should have been taken.

13. Next see if any of those special handling items pertain to you.

14. here is where you will enter a sale price. Remember i had you allocate your rent forgiven for each of your assets? Here is where you would enter $2000 or whatever your allocation is.

15. The very next screen will let you know if you have a gain or a loss on the sales and what your depreciation deduction is for each year.

16. Now follow these same steps for your remaining assets. if you already have asset summaries for each of these, all you will need to do is report your retirement date and the forgiven rent allocation.