Will Turbo Tax guide me to move my small business from sole proprietor income to hobby income?

[julieandgeoff202]

Will Turbo Tax guide me to move my small business from sole proprietor to hobby income. I expect losses in 3 of 5 consecutive years and will move to hobby income (misc. income)  I know I will need to remove schedule C and move business assets such as car and home to personal use again.  Can you generally explain how this will be handled?

[KrisD15]

Don't "move" the business, simply end the business. 

Next, if you have Hobby Income, report that as such. 

Your business doesn't HAVE to have a profit in 3 of the next 5 years if you can show that you are STRIVING to make a profit, but if this is done more for pleasure, again, just give up and end the business, convert the assets to personal use. 

Keep track of the basis and depreciation on all your assets. 

If you sell the assets in the future, such as the car, you may need to claim some of the depreciation recapture. 

If anything is sold at a loss, the loss will not be claimed since it will have become personal property. 

If you were using the Simplified Method for the Home Office Expense, you needn't report anything to account for that. 

[julieandgeoff202]

Thanks for your response. 

Just to clarify,  when I remove the business, I will verify that the home office is no longer being used for bus. purposes and TT will populate the correct questions I need to answer in order to remove the entire business?

I dont plan to sell the car, just resume personal use.  But isn't my depreciation listed in all my past TT returns?  I don't quite understand why I would need to keep track of depreciation going forward, since I will be using the car and home office for personal again and depreciation will not factor in again?

I am not using simplified method, I am claiming my expenses and home related itemized deductions, so this will all go away once I remove the home office?

[KrisD15]

Yes, "removing" the business is as simple as reporting the business has ended in 2023.

Yes, there is a question asking if this was the case for 2023.

No, the depreciation that needs to be recaptured never goes away unless the property is inherited. 

You do need to record your adjusted basis for the vehicle and home. 

Unless the home loses value, you most likely will claim the home depreciation you claimed for the home office when you sell the house. 

You do not need to keep track of depreciation going forward for using the vehicle for personal use, but you do need to factor in the depreciation you claimed while it was in business use. For example, if the vehicle cost 25,000 and you took 5,000 depreciation, your "adjusted basis" is 20,000. If you sell the vehicle for over 20,000 (up to 25,000)  that is depreciation recapture. (Anything over 25,000 would be capital gain which doesn't normally happen with a car but could with real estate). 

It can get tricky if you took BONUS deprecation or used Section 179 for any business assets. If so, when the assets becomes less than 50% business use, you would figure depreciation using the "straight line" method for the business use and claim the excess as Ordinary Income the year of the change. 

The Home Office would not be affected, but other assets could be if you elected Bonus/ Special Depreciation or took the Section 179 Deduction. 

If the value went down for the vehicle, and if it was still being used for business, when sold there could be a business loss, but once it's turned into personal use, any loss is no longer recognized. 

So going forward, you need to record the depreciation on the home office, subtract that from your basis in the house and use that as the adjusted basis when you sell. 

The same is done for the vehicle and other assets, although if the other assets are held onto long enough, their values should decrease making depreciation recapture less of a burden. 

If any bonus/special depreciation or Section 179 was used, the difference between that and straight-line (equal depreciation over the life of the asset) is claimed the year the asset is no longer more than 50% business. 

If the vehicle use varied over the years, the TurboTax program cannot make the calculation for you since each year would need to be figured separately. 

If you used Standard Milage, there is a "Depreciation Equivalent" built into each mile and that represents the deprecation used to adjust the basis. 

If you "Gift" the vehicle, the person that obtains the gift takes on the responsibility of reporting depreciation recapture. 

IRS Pub 544