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Old 02-17-2013, 01:50 PM
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Depreciation and recapture of Special Depreciation Allowance when converting to personal use?

I was self-employed 2010-2011. During this time I purchased various assets (computer equipment, software; no listed property) for business use. The assets were depreciated with the Special Depreciation Allowance and the remainder using 200DB/HY. No Section 179 election was taken. The business activity ended at the end of 2011 and the property was converted to personal use in 2012 (1/1/2012).

#1 - Is a recapture of excess depreciation (from SDA and MACRS) necessary upon conversion to personal use?
#1b - If recapture is necessary, where should that recapture be reported as income? Should it be personal "income" or business "income"?
#2 - What should the schedule C/Form 4562 look like? What should the current year depreciation be calculated on? If the propery was converted to personal use 1/1/2012, is it sufficient to say less than 50% business use and that the assets were taken out of service 1/1/2012? Or should the assets be removed from reporting altogether?

Thanks!



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Old 02-17-2013, 03:19 PM
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“#1 - Is a recapture of excess depreciation (from SDA and MACRS) necessary upon conversion to personal use?”===== A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction.




“#1b - If recapture is necessary, where should that recapture be reported as income? Should it be personal "income" or business "income"?”===========> For any other disposition of section 1245 property, ordinary income is the lesser of the following amounts. The depreciation and amortization allowed or allowable on the property.The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Use Part III of Form 4797 to figure the ordinary income part of the gain. A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property and sec 1231 gain. LTCG.Ordianry income on form 4797 is reported on 1040 line 14 and LCCG is reported on form8949/Sch D of 1040 line 11, 15, 16,(you may need to file qualified div /Cg worksheet on 1040) and form 1040 line 13.


“#2 - What should the schedule C/Form 4562 look like? What should the current year depreciation be calculated on? If the propery was converted to personal use 1/1/2012,?”========>You need to total the amount of depreciation deductions claimed on Form 4562 and a separate Form 4562 must be filed for each different business activity you engage in. This is the depreciation deduction you may claim on the business income tax return you file with the IRS on Sch C;the depre deduction in the year of conversion from biz to personal use is modified to reflect the number of months the asset was used for biz.
“is it sufficient to say less than 50% business use and that the assets were taken out of service 1/1/2012? Or should the assets be removed from reporting altogether?”========> To qualify for accelerated MACRS, business use of your biz assets, computer,vehicle or etc must be more than 50%. Using accelerated MACRS allows you to deduct a higher amount of depreciation in the early years of the recovery period than you could deduct using the straight-line method of depreciation.In the year business use drops to 50% or less you must stop using accelerated MACRS and start using straight-line depreciation for that year and all remaining years of the asset's recovery period.As a result of this drop in business use to 50% or less, all that extra depreciation deducted in the early years for the asset by accelerated MACRS has to be recaptured, meaning, included in your income in the year business use dropped. Report the recaptured amount, in Part II of Form 4797, Sales of Business Property and attach it to Form 1040.



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Old 02-17-2013, 05:10 PM
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Originally Posted by Wnhough View Post
A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction.
Is there a recognized gain if the property is converted to personal use and not sold/exchanged?



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Old 02-17-2013, 05:17 PM
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Is there a recognized gain if the property is converted to personal use and not sold/exchanged?"=====>No;however, in the year business use drops to 50% or less all that extra depreciation deducted in the early years for the asset by accelerated MACRS has to be recaptured, meaning, included in your income in the year business use dropped. Report the recaptured amount, in Part II of Form 4797, Sales of Business Property and attach it to Form 1040.



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Old 02-17-2013, 05:28 PM
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Originally Posted by Wnhough View Post
No;however, in the year business use drops to 50% or less all that extra depreciation deducted in the early years for the asset by accelerated MACRS has to be recaptured, meaning, included in your income in the year business use dropped. Report the recaptured amount, in Part II of Form 4797, Sales of Business Property and attach it to Form 1040.
Ok, so I'll:
  • Report the recapture on Form 4797
  • Report that recaptured amount as "other income" on my Schedule C

These assets were never used for business in 2012 (converted 1/1/2012) and I have no business activity in 2012. For the assets that I converted, do I still need to list them on Form 4562? Or should my Schedule C be empty except for the recaptured depreciation?



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Old 02-17-2013, 05:56 PM
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“•Report the recapture on Form 4797
•Report that recaptured amount as "other income" on my Schedule C”========> As you are a self employer(or an IC, NOT a reg EE), then , you need to report the recaptured amount in Part II of Form 4797 on Sche C on the Other income ,line 6.

“These assets were never used for business in 2012 (converted 1/1/2012) and I have no business activity in 2012. For the assets that I converted, do I still need to list them on Form 4562? Or should my Schedule C be empty except for the recaptured depreciation?”=======>No; you do not depreciate the assets on form 4562 any longer. but keep the depreciation schedules from last year to keep track of the basis in the assets should they be sold somewhere down the road.also I GUESS your Sch C needs to shoe only other icneom, the recaptured unrecap depre taken previously before the biz use drops to 50% or less. As long as the amoun ton SCh C line 29 / 31 is $400 or exceeds $400 you need to feiul return and also as long as the amount on Sch SE line 2 / 3 is also $400 orexceeds $400 you need to pay SECA tax;



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