How to convert vehicle from business use to personal - Only Used MACRS depreciation

[mgmorris]

I am a managing member of a 2 person LLC.  My role has been reduced to remote work and I would like to convert the business vehicle to a personal vehicle since my business driving is negligible.  I did not take the section 179 depreciation deduction when the vehicle was put into service.  It has been on MACRS the whole time.  Will there still be a depreciation recapture?  If it is converted, is the vehicle still a listed asset of the business?

[PatriciaV]

No, if you convert the vehicle to personal use, it will no longer be listed as a business asset. There is no depreciation recapture when you convert to personal use.

However, when you sell the vehicle, your gain or loss will be adjusted for the depreciation that you took during the years you reported the vehicle for your business. Note that depreciation is included in vehicle expenses, even if you didn't claim Section 179 or if you claimed only the standard mileage deduction.

[mgmorris]

@PatriciaV 

Thank You!

I have some more questions:

1.  When removing the asset from Quickbooks, should this be recorded against owner equity? So the Journal Entry would credit the asset, debit accumulated depreciation, and debit the remaining amount from owner equity?

2.  If we do end up selling the vehicle at some point, would I have to calculate depreciation recapture on the business return or on the personal returns?

3.  Turbotax does not have an option to select "convert to personal use" but they do have an option of "dispose by any other means" which they describe as their "catchall"  Is that the correct designation? When I choose this, it creates a basis amount (cost of asset-prior depreciation=$x) which causes my balance sheet to be off by that same amount.  

[PatriciaV]

1. Yes, booking the conversion to personal use as a distribution to the owner is an acceptable accounting entry.

2. The depreciation recapture would be recorded with the sale. If the vehicle remains a personal use asset, then the gain on the sale would be reported by the owner.

3. Yes, "disposal other than a sale" is the correct option for this transaction.

[mgmorris]

@PatriciaV 

I am having a bit of trouble converting the asset in TurboTax.

Am I supposed delete the asset from TurboTax asset summary or just mark it as disposed? 

I have been going through trial and error here are the problems:

a) If I keep the asset on the books and enter in total prior year depreciation (under the deductions tab), my net income is wrong.  The net income ends up increasing by the amount of prior depreciation.

b) If I keep the asset on the books but do not enter total prior year depreciation, then my net income is correct but an error pops up because I put down 0% for business use.

c) If I delete the asset altogether, everything will balance and I don't get the error about % of business use.

When checking the balance sheet, do I input the remaining basis amount (the amount of the vehicle that was not yet depreciated) into property distributions to partners? Or was I supposed to put the original purchase amount of the vehicle?

My Journal Entries in Quickbooks were Credit Assets $10,000, Debit Accumulated Depreciation $6,000 and Debit Owner Equity $4,000.  The $4,000 is the remaining amount that has not yet depreciated.  Is that correct or is there another step that I missed?

[PatriciaV]

Your best option is to report the vehicle as sold for its book value (purchase price less accumulated depreciation). This is the amount of the property distributed to the partners. If the vehicle was not already recorded as a business asset in TurboTax, you'll need to record it first, including the depreciation. Then report it as sold. The net result is zero gain/loss for the partnership.

Yes, the property distribution amount is equal to the remaining book value of the vehicle. Your journal entry example is correct.

Note that the vehicle will be reported on the Depreciation report in TurboTax. This supports the calculations made for the "sale."

[mgmorris]

@PatriciaV 

I run into the same problem recording it as a sale. 

My net income increases by the amount of total prior years depreciation.  Am I not supposed to enter total prior years depreciation under Deductions>Depreciation of Assets?

The asset worksheet for this asset keeps giving me an error because I listed business use as 0%. Can I ignore it? 

[PatriciaV]

Enter whatever percentage is correct for business use. Even though you no longer use it for business, you should enter the historical number.

Are you entering the vehicle for the first time on this tax return? If so, follow the entry screens carefully. TurboTax should accurately calculate the total accumulated depreciation for the asset. You won't enter any depreciation other than special depreciation (if you claimed that in the first year). You should not have any depreciation expense in the year of the sale. 

Be sure you're entering the ending book balance as the sales price ($4,000 in your example).