Scape value of depreciated machine

[Phare47]

We had a sole proprietor machine shop. We retired about 10 years ago. The machine was fully depreciated but now we are selling it for scrap.  Is the scrape $ taxable?  If so, how? We haven't filed a schedule C for 10 years.

[Mike9241]

report the income on schedule 1 line 8z

[Phare47]

This will be for the 2023 taxes, Is that 1040 or do we have to do a schedule C? 

[Opus 17]

Often, you depreciate equipment down to a salvage value, not down to zero.  But you need to know the current adjusted cost basis of the equipment (whether zero or some residual value).  Whatever amount of proceeds that is more than the current basis is taxable income.  Since the business is closed, you can report the income as “other miscellaneous income” as mentioned.  

[Opus 17]

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@Phare47 wrote:

This will be for the 2023 taxes, Is that 1040 or do we have to do a schedule C? 

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You don't need to file a schedule C since you are not an ongoing business.   Assuming the business was a disregarded entity previously, the income would just flow to your regular tax return anyway, and since you are not an ongoing business you would not report self-employment tax.  You can just report the income portion of the sales proceeds as "other income".

Now, I will note that "other income" could be taxed as high as 37%, depending on your overall income.  The recovery from the sale of the machine is depreciation recapture (in most cases) which is taxed as regular income but with a cap of 25% (in most cases).  So if your other income puts you in the 32% or higher tax bracket, you might pay more tax on the machine than if you reported it as recapture.  I don't know what to do in that situation, you may want to ask a tax professional.  But I still don't think you file a schedule C.   

[tagteam]

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@Opus 17 wrote:
....if your other income puts you in the 32% or higher tax bracket, you might pay more tax on the machine than if you reported it as recapture....

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There is no option here since the machine is personal property (Section 1245 property), not real property (Section 1250) and, as such, there is no 25% cap on Section 1245 property as there is with Section 1250 property.

As a result, reporting the sale as miscellaneous or other income will not have any kind of adverse impact. The other alternative would be to report the sale on Form 4797 (Part III) as the sale of Section 1245 property where the basis is $0, but that would effectively achieve the same result as reporting the sales proceeds as other income.