Conversion of Sec 179 depreciated vehicle from business to personal use

[AJMorris]

Client's spouse owned a business in 2023.  Spouse used a vehicle 100% in business since 2021.  Vehicle fully depreciated under Sec. 179.  In 2023, spouse suddenly dies in Sept.  Surviving spouse wants to keep the vehicle.

4797 doesn't seem to fit.  Do I need to recapture depreciation in 2023 based on the conversion to personal use?  If so, what form(s) do I use to do this.

[BobKamman]

All deaths are sudden.  One moment the heart is beating, the next it isn't.  But sometimes it is unexpected.  Was the vehicle titled to the spouse (so, stepped-up basis)?  Was this a Schedule C business, or taxed as a corporation?

[AJMorris]

Schedule C business.  I think the vehicle was titled jointly.  If so, there should be a 50% step up.  Does that affect the recapture of the 179 depreciation?

[AJMorris]

Just had the client send me the license fee.  It is in the deceases spouse's name.

[sjrcpa]

The business use percent dropped below 50% so the excess 179 deduction needs to be recaptured. It's income. 4797 Page 2 Part IV to start. You probably have to do the calculation manually. I don't think death of business user is an exception.

Full step up to FMV.

[AJMorris]

Ok, let me see if I can make that work in the 4797

[taxiowa]

Sounds like deceased used and owned 100% of vehicle and took a deduction for 100%.  On the bottom of enterable 4797 there is three lines to enter details (33-35).  179 deduct taken minus the normal allowable depreciation equals the recapture amount.  Put this recapture amount on Schedule C line 1.

[AJMorris]

Yep, I found that, thanks!  It's an interesting issue, since the vehicle was used 100% for business for 8 months, then the spouse barely drove the vehicle for the last 4 months.  When you look at the mileage for the year, the car is still way above 50% for business, and close to 80%.  All of the schedules for business use seem to want an "average".  But for the death of the one spouse, the 50% would not be triggered.  California is a whole other story.

[BobKamman]

If the taxpayers are residents of California then "the whole other story" is community property, and there is stepped-up basis for the whole thing and forget about the 4797.  

[AJMorris]

I’m not finding the recapture exclusion in a community property state.  Is there something I can reference to avoid the 4797.  Even on recapture, the widow can still contribute the recapture income to a solo 401k to avoid income taxes (they’ll still have to pay empl. taxes on the recapture ). 

[BobKamman]

That makes no sense whatsoever.  There was 100% business use up to date of death.  Nothing to recapture.  And since when does 4797 gain flow to Schedule SE?  And why would a grieving husband be concerned about a few thousand dollars added to a 401(k) in return for a higher amount being added to AGI?

[AJMorris]

Recapture flows to schedule C as “Other Income”. Auto now used personally by surviving spouse, so 100% personal. Auto was 100% business until the DoD. I may be wrong but it seems like a conversion to personal use. 

[BobKamman]

There is no Section 179 recapture because it was always 100% business use for this taxpayer.  Don't let a joint return confuse you.  If MFS, you would make her recapture Section 179 just because she died?  Get real.  

[AJMorris]

Wow. That was harsh. The husband was the only owner of the business.  Can you please point me to something I can reassure the widow on?  Her neighbor was caught in the same situation with another CPA  firm and their conclusion was no recapture was required. That was one year ago. She wants me to cite what I’m relying on if there is no recapture so she can try to rest at night. Her neighbor paid a penalty for asserting there was no recapture. She told me it’s hard enough to be a widow and she doesn’t want to battle the unlimited budget of the IRS. 

[taxiowa]

I am pretty certain you can cite a random guy on the internet to your client.  But if it helps, I agree with Bob.  So now you have two random internet dudes.

I think what Mr. Kamman is observing is that the business closed when they closed the casket.  The husband never used the vehicle for business less than 100% and thus never reduced the business use to less than 50%.  Spouse takes over vehicle at FMV and is not using it in business so there is no drop in business usage.  Neighbor needs to get someone to explain this to IRS in her case.

The whole intent of congress was to not let someone buy car 12/15 and take 179 and then move car to personal the following year.  This did not happen in your case as husband died unexpectently and of course sudden.

[BobKamman]

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@AJMorris wrote:

"Wow. That was harsh. The husband was the only owner of the business."  

Or, as your original post stated, "Client's spouse owned a business in 2023."

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[sjrcpa]

So, I started out agreeing with OP's premise that there is 179 recapture.

I have rethought this and now agree with @BobKamman and @taxiowa .

It was a business use vehicle up until death. It was not converted to personal use prior to death. 

Death stopped that clock.

[AJMorris]

I found this case:  

One significant tax case that deals with recapture when a business owner dies is the Estate of Franklin Z. Adell v. Commissioner, 134 T.C. 16 (2010). In this case, the Tax Court addressed the issue of recapture upon the death of a business owner who had claimed depreciation deductions for certain assets used in his business.

Franklin Z. Adell owned rental properties and claimed depreciation deductions on those properties over the years. Upon his death, the IRS asserted recapture of a portion of the depreciation deductions claimed by Adell, as required under the tax code when depreciable property is sold or otherwise disposed of. The estate contested the recapture, arguing that because Adell died, there was no sale or disposition of the property triggering the recapture provision.

However, the Tax Court ruled in favor of the IRS, holding that upon the death of the taxpayer, the recapture provision is triggered, and the estate must recognize the recapture income. This case illustrates how recapture rules can apply even upon the death of a business owner, impacting the taxation of assets held by the estate.

[BobKamman]

I suspect that case is a product of AI, not a real Tax Court decision, since it is not available at any reputable website and the "134 TC" cases for 2010 end in No. 14.  (There are other Franklin Adell estate cases, none of them involving income tax, from later years).

This is not the season to be wasting our time.  

[sjrcpa]

That's not a valid cite as far as I can tell..

Mr. Adell's estate had 3 cases

Estate of Franklin Z. Adell, et al., TC Memo 2014-155

Estate of Franklin Z. Adell, et al. v. Commissioner, TC Memo 2014-89

Estate of Franklin Z. Adell, et al. v. Commissioner, TC Memo 2013-228

They had to do with estate and gift tax, estate valuation and installment payment of estate tax, according to the headnores.

[rbynaker]

My attempts at using AI (Google Bard/Gemini) for tax research have resulted in bogus cites.  But at least it does a good job at sounding like it knows what it's talking about.

[BobKamman]

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@rbynaker wrote:

My attempts at using AI (Google Bard/Gemini) for tax research have resulted in bogus cites.  But at least it does a good job at sounding like it knows what it's talking about.

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And when all is said and done, isn't that what really counts?

[rbynaker]

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@BobKamman wrote:

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@rbynaker wrote:

My attempts at using AI (Google Bard/Gemini) for tax research have resulted in bogus cites.  But at least it does a good job at sounding like it knows what it's talking about.

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And when all is said and done, isn't that what really counts?

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Absolutely.  Never let the facts get in the way of a good story!

[AJMorris]

Agree.  This may be what I need, from CCH:

Disposition of Depreciable Property by Gift or Death

The recapture of depreciation as ordinary income upon the sale or disposition of section 1245 or section 1250 property ( ¶1779) does not apply to dispositions by gift or transfers at death, other than taxable transfers of section 1245 or section 1250 property in satisfaction of a specific bequest of money ( Code Secs. 1245(b) and 1250(d); Reg. §§1.1245-4 and 1.1250-3). However, unless the donee is tax-exempt, upon a later sale the donee realizes the same amount of ordinary income that the donor would have realized had the donor retained the property and sold it. Also, if a taxpayer contributes section 1245 or section 1250 property to a charitable organization, the allowable charitable contribution deduction is reduced by the amount that would have been treated as ordinary income had the taxpayer sold the asset at its fair market value ( ¶1062).

[TaxGuyBill]

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@AJMorris wrote:

Agree.  This may be what I need, from CCH:

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I don't think that is helpful either.  I don't think there is any question that there would not be any recapture under §1245 or §1250 for the sale of the asset.  The question is if recapture under §280F(b) applies or not.