Depreciation when sole proprietorship is closed

[Laurie000]

I started a sole proprietorship in 2024 and want to claim depreciation on equipment purchased which I understand will be depreciated over 5 years. What happens if I have to close the business before the equipment depreciation value is down to zero? How would this affect my tax filing when I closed the business? Would I then be owing taxes on the remainder of the value of the equipment and would it be considered income at that point?

[JamesG1]

You depreciate the equipment as long as the activities of the sole proprietorship are reported on your tax returns.

If the activities of the sole proprietorship end and are no longer reported on the tax return, no more depreciation is recorded.  In a sole proprietorship, your cost basis in the asset is the original cost less depreciation taken.

If you report depreciation of $200 on a $1,000 piece of equipment that you purchased in 2024 in your sole proprietorship, your cost basis in the piece of equipment becomes $800.

If the business ends in 2025 and that piece of equipment is sold for $700, the loss on the sale of the piece of equipment would be $100.

Upon sale of the piece of equipment, there may be a recapture of some or all of the depreciation taken.  The TurboTax software will make that calculation for you.

If this does not completely answer your question, please contact us again and provide more information.

See this TurboTax Help here.

[Laurie000]

Thank you for your reply. But what happens if after I close the business with value still remaining on the equipment that I have taken depreciation on for a couple years but now I want to close the business and keep the equipment for personal use? How is this scenario handled and taxed?

[PatriciaV · Accepted solution]

If you convert an asset to personal use, you will indicate that on the asset interview. No sale is recorded, so you need to keep good records in case the asset is sold in the future. You'll pay taxes on the depreciation expense that you took while it was used for business purposes.

When you close the business, be sure you handle closing out all the assets before you report that the business is closed.