Business vehicle and decreased business use after 6 years

[nancylin]

I bought a new car in January 2018 for sole proprietor use, with >50% business use.  I have been using the MACRS method (with half year convention) for depreciation every year.  2024 tax year represents my 7th year using the car.  My sole proprietor business drives starting in 2024 represent only 13% of my business vehicle use.  Questions:

1.  Should I continue to report this vehicle as a business vehicle with 13% business use and claim the miniscule actual vehicle expense deductions (around $400)?

2.  If I do this, I see on TurboTax that my depreciation method automatically shifts from "200DB" (200% declining balance?) as it has been in previous years, to "ALT" (alternate method).  I see other drop-down options of Straight, prescribed ACRS, 200DB, 150 DB, or ALT.  I take it that this ALT is what it should be?

3.  Is this the best strategy, since I am still using it for business purposes, even though for much less than 50%? 

4.  The other option would be to convert to personal use, right?  Would there be any benefit to doing this?  What are the ramifications of doing this vs. sticking with continuing a small % of business use?

5.  Am I correct in thinking that regardless of whether I choose to continue "business use" or convert to personal use, I will be paying back the tax breaks in the form of delayed recapture once I eventually sell the vehicle, right?  I plan to keep the car for years and years, even if I eventually retire and shift to 0% business use.  Thank you!

[PatriciaV]

1) Since there is no minimum percentage of business use required to claim actual expenses for a business vehicle, you may wish to continue reporting this vehicle for your business.

2) Yes, TurboTax will adjust the depreciation calculations based on your change in business use. Note that if you claimed a Section 179 deduction in the year you first started using the vehicle for business, you may be subject to depreciation recapture because the business use dropped to 50% or less. Recapture is reported as ordinary income on Form 4797.

3) Every expense reduces your taxable business income.

4) If you would rather not track your vehicle expenses, converting the vehicle to personal use would eliminate the need to keep records. There is no impact on your taxable business income when you stop using a vehicle, other than a loss of the deduction.

5) Follow up to #2 above: If at the time you dispose/sell of the vehicle, it would have otherwise been depreciated fully (not considering an applicable 179 Deduction), then you should NOT be subject to Depreciation Recapture.

Additional Information:

• IRS Pub 946 When Must You Recapture the Deduction?

[nancylin]

Hi, PatriciaV,

Thank you so much!

To clarify your Section 179 deduction questions and comments...

I did claim that 179 deduction in 2018, my first year, but 2024 is my first year where I used it for <50% business use, and 2024 marks the 7th year of continued use. 

1. So, I should have passed the 5 year vehicle recovery period, yes?

2.  I should not see form 4797 for immediate depreciation recapture in my TurboTax forms for 2024, correct?

3.  Can you clarify your last comment about being fully depreciated?

   3a.  When I sell/dispose of the car in another 5-10 years or more, would it be fully depreciated? 

   3b.  And does your statement (about fully depreciated and not being subject to recapture) depend on whether or not I took the 179 deduction in 2018? 

   3c.  Bottom line, basically, in my situation (I took the 179 and I have used it for biz use >50% for 6 years and will dispose of it after at least 10+ of continuing to claim it as a business expense, albeit very low % use and so still getting a tiny deduction every year), would I be subject to recapture way down the road? 

I am assuming my tax breaks will come back to haunt me and catch up with me at some point in the future, no?

Thanks again for your prompt and great responses!

[nancylin]

Hi, PatriciaV,

Thank you so much for answering my questions!

To clarify your Section 179 deduction questions and comments...

I did claim that 179 deduction in 2018, my first year, but 2024 is my first year where I used it for <50% business use, and 2024 marks the 7th year of continued use. 

1. So, I should have passed the 5 year vehicle recovery period, yes?

2.  I should not see form 4797 for immediate depreciation recapture in my TurboTax forms for 2024, correct?

3.  Can you clarify your last comment about being fully depreciated?

   3a.  When I sell/dispose of the car in another 5-10 years or more, would it be fully depreciated? 

   3b.  And does your statement (about fully depreciated and not being subject to recapture) depend on whether or not I took the 179 deduction in 2018? 

   3c.  Bottom line, basically, in my situation (I took the 179 and I have used it for biz use >50% for 6 years and will dispose of it after at least 10+ of continuing to claim it as a business expense, albeit very low % use and so still getting a tiny deduction every year), would I be subject to recapture way down the road? 

I am assuming my tax breaks will come back to haunt me and catch up with me at some point in the future, no?

[PatriciaV]

1) Yes, if you have reported this vehicle for at least six years, it is fully depreciated. You can confirm this by locating the Depreciation and Amortization Report, a worksheet created by TurboTax as part of your return. If the cost less all types of depreciation equal zero, the asset is fully depreciated.

2) If there is an amount in the Section 179 column of the depreciation report, you may have recapture reported on Form 4797 because the business use dropped below 50%. The line item will mention Section 179.

3a) Yes, per my response #1, your basis in the vehicle should be zero (fully depreciated). 

3b&c) Assuming you report Section 179 recapture this year, you would not have any additional recapture when you sell the vehicle.

[nancylin]

Thanks for the follow up response!

My Form 4562 (Dep & Amort Report) for 2024 shows all columns being 0, given a 14.8% business use for the year.

1)  That should confirm that the car is fully depreciated, yes?

2) There is no amount in the Sect 179 column of this report, thus I should not have a Form 4797.  Correct?

3a) Regarding your answer "3b&c": I should NOT have any additional recapture when I sell the car, even if I have nothing to report for Sect 179 this year, correct? 

3b) Is it correct that I should be free from delayed recapture later when selling, because my car is already fully depreciated? 

3c) And it is fully depreciated, based solely on the 6+ year history of 50%+ business use?  Meaning it doesn't matter the total dollar value of all the previous years of depreciation, but rather just the 6+ year history?

Thank you!

[RobertB4444]

When you sell the car you're going to have a gain based on business use.  Since you don't have the 179 recapture on your tax return this year then you will owe that recapture at the time of sale.  Keep track of your business use percentages (including this year's 13%) so that you can calculate business use percentage over the life of the car to figure out what percentage of the sale price is taxable income.  

@nancylin 

[nancylin]

Hi RobertB4444, Thanks! I am a bit of a novice and still somewhat confused!  Please let me know if I am wrong about anything below.  I might be confusing several different issues here (depreciation deduction vs. depreciation recapture at the time of sale)...

1. I took the 179 deduction in 2018, the first year I got the car and started using it for 50%+ business use.

2.  Another expert responded that if I took the 179 deduction in my first year, I might be subject to depreciation recapture because my business use dropped to <50% for this year.  However, does it help that I used the car at 50%+ for business for 6+ years?  If so, this means that my car is fully depreciated based on the fact that I used the car for 6+ years at >50% business use for all those years, and that I don't have to worry about anything this 7th year even though my business use has dropped to <50% this year for the first time?

3.  Your response suggests that I might owe recapture when I eventually sell the car.  The other expert stated: "Assuming you report Section 179 recapture this year, you would not have any additional recapture when you sell the vehicle."  Since I am not reporting 179 recapture this year (I did it in 2018), I WILL owe when I sell later, yes?  I want to make sure I am understanding your two expert responses and that there is no contradiction.

Thanks!

[RobertB4444]

You're correct on all counts.  You don't owe depreciation recapture this year because it was greater than 50% for 6 years so you're good on that.  But when you do sell the car there will be some depreciation recapture from the sale amount.  If that recapture had happened this year (which it didn't) then you wouldn't have it at the time of sale.  

You've got a good handle on it.  

@nancylin