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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience:  Taxes, Immigration, Labor Relations
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Lev, I am an independent driving instructor, non 1099. I pay

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Lev,
I am an independent driving instructor, non 1099. I pay all expenses for the car I own and use for this job (and use it in another side business I have and deduct mileage). For the year up until November I had a 2000 Chevy Cavalier that I bought cash June of 2011. In November I bought on payments a 2008 Prius. I eventually sold the Cavalier at no profit. What is the procedure for disposing of the Cavalier onthe taxes? In one place in TurboTax it wants me to enter trade in information, but when I tell it that it wasnt a trade in it still wants to treat it as a trade in and eventually wants a depreciation amount (on the state tax in particular). How do I handle this?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
When you dispose the asset which was used for your business - the sale transaction should be reported on form 4797 - and you might need to recapture depreciation.
While you did not deduct specifically depreciation - it is included into your mileage rate deduction.
Because you deducted your transportation expenses based on the standard mileage rate in previous years - you need to adjust your basis on that car.
Specifically - see page 26 in this publication - http://www.irs.gov/pub/irs-pdf/p463.pdf
Disposition of a Car - in the middle column - depreciation rates per mile in previous years.
Use these rates to adjust your basis.

Customer:

OK, I see the publication, but how would I use that with TurboTax? TT askes the questions and I never saw a reference to the stuff in the publication. Also, I read in the pub a "like kind exchange." I didnt "trade it in" at the dealership, I sold it outright, but the newer car was a replacement for the older one, so that would be the same thing, wouldnt it? How do I do all this in Turbo Tax?

LEV :

"like kind exchange" doesn't relate to your situation.
However - the sale transaction should be reported and you might have a gain that should be recaptured.
The first step is to determine your basis - that is your original purchase price PLUS any improvements MINUS depreciation based on rates per mile in previous years.
Then - your gain = (sale price) - (adjusted basis).
If you have a gain - it must be recaptured up to the amount of depreciation.
The sale transaction is reported on form 4797 - that you need to locate in the Turbo Tax.

Customer:

Going to work now. Will be back later tonight. But please enter a reply my last entry and Ill pick it up from there tonight

LEV :

Please take your time. Let me know if you need any help with reporting.

Customer: Improvements? Does that mean doing maintenance and replacing defective parts? I spent over 1200 last year fixing things before finally getting rid of it.
LEV :

Repairs just keep your property in good working condition but do not add to the value of the property.
An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.
Betterments. Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
Restoration. Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation. Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property.

Expert:  Lev replied 1 year ago.
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Customer: replied 1 year ago.


OK. I bought it for 1000 in 2011, June 10th. I continually replaced work/defective parts. Replaced A/C/ compressor, alternator, brakes, etc. That wouldnt be a betterment I suppose. I sold it for 1200 in December 2012. Bought it with 175020 miles and sold it with 226935. 50449 of those were business miles, 23030 in 2011 and 27419 in 2012. What do I do with this information now?

Expert:  Lev replied 1 year ago.
See page 26 in this publication - http://www.irs.gov/pub/irs-pdf/p463.pdf
Disposition of a Car - in the middle column - depreciation rates per mile in previous years.

23030 business miles in 2011 * $.22 = $5067
27419 business miles in 2012 * $.23 =$6306
Your basis should be reduced by that amount - but not below zero.

So far - your basis after adjustment is zero.
If you report the sale transaction - there will be the gain = $1200 (sale price) - zero (adjusted basis) = $1200.
That amount will be added to your other taxable income.
Customer: replied 1 year ago.

Why is the adjusted basis zero. I put a ton of miles on the car, doesnt it depreciate?

Expert:  Lev replied 1 year ago.
When you deduct travel expenses using standard mileage rate - part of it is attributable to depreciation.
23030 business miles in 2011 * $.22 = $5067
27419 business miles in 2012 * $.23 =$6306
These are amounts related to depreciation based on miles you deducted in 2011 and 2012.- and these amounts are subtracted fro your original basis.
So your adjusted basis will be zero.
Customer: replied 1 year ago.


ok, so what do i do now in TurboTax? In business expense on "business vehicle expense", it has me edit for this car since I stopped using it in 2012. There is a place called "Trade in link" and TT thinks this was for a trade in, which it was not, i sold it outright. I was told by a previous Just Answer expert that I needed to enter stuff in teh trade in areas as I replaced this vehicle with another one. It has a place to edit on teh form 8824. How can I fix this ? Going to bed now will be back in the morning

Expert:  Lev replied 1 year ago.
If there was no trade in - you should not report the trade in...
There is a section in IRS publication 463 titled "Car trade-in" - but that is not related to your situation.

See - Depreciation adjustment when you used the standard mileage rate. If you used the standard mileage rate for the business use of your car, depreciation was included in that rate. The rate of depreciation that was allowed in the standard mileage rate is shown in the chart that follows. You must reduce your basis in your car (but not below zero) by the amount of this depreciation. If your basis is reduced to zero (but not below zero) through the use of the standard mileage rate, and you continue to use your car for business, no adjustment (reduction) to the standard mileage rate is necessary.

What you need to do under the tax law - to report the sale of your car - and determine the gain of $1200 - which would be taxable. Because your depreciation is more than that amount - the gain will be treated as depreciation recapture.

See also - Disposition of a Car If you dispose of your car, you may have a taxable gain or a deductible loss. The portion of any gain that is due to depreciation (including any section 179 deduction, clean-fuel vehicle deduction (for vehicles placed in service before Jan. 1, 2006), and special depreciation allowance) that you claimed on the car will be treated as ordinary income.

The sale transaction is reported on the form 4797.
So $1200 in your example - will be your ordinary income.
Customer: replied 1 year ago.


What do I do with this info in Turbo Tax? Turbo tax keeps telling me this was associated with a trade in and theres so box to say if it was or was not. I DO see where on teh new vehicle if it was bought with a trade in and I say No it was not, but TurboTax keeps saying it is.

Expert:  Lev replied 1 year ago.
I am not sure what exactly you entered into Turbo Tax - and it would be hard for me to guess.

As you mentioned - someone advised you to enter "trade-In" into your tax preparation software - that would "trick" the system and would allow you not to report the sale transaction and pass validations.
However - that doesn't seem according to the tax law.

According to the tax law - because previously you deduct depreciation on your business asset - and sold that assert with the gain - that amount should be recaptured and added back to your income.

The tax preparation software should ask you - if you disposed the car during the tax year? - and if yes - the sale transaction should be reported on form 4797.
The fact of purchasing a new car (as long as there was no trade-in) has no relation to that reporting.
Customer: replied 1 year ago.

I dont recall TT ever asking if I disposed of the car, it only asked if I BOUGHT it as part of a trade in. Never seemed to care if I disposed of it. Perhaps I should delete the car then reenter it ?

Expert:  Lev replied 1 year ago.
The question related to purchase came when you entered information about a new car.
However - the question regarding if you sold or otherwise disposed assets used in your business must come - most likely you overlooked it.
See - Detail of asset dispositions - http://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/Business-Tax-Preparation/INF12001.html
If your business sold any depreciable assets during the year, you'll need the following information to calculate any gain or loss on the sales for tax reporting purposes:
•Description of the asset
•Date of sale
•Sales price of the asset
•Any expenses of the sale
•Accumulated depreciation (if not calculated by the software)
Customer: replied 1 year ago.

OK, but what do I do with whats entered already? TT thinks it was traded in and there was no place to say otherwise anyway. So what do I do with the info you sent me? Should I delete that car from my return and then reenter it?

Expert:  Lev replied 1 year ago.
You definitely may delete entry and start again. It would be hard for me to guess what exactly you entered.

Any the tax preparation software (including Turbo Tax) is trying to guide us through tax regulations by asking many questions.
In connection with your situation - there two possible places
- related to your old car - the question should be if you sold or otherwise disposed your old car.
- related to your new car - the question should be if it was leased or purchased and if there was a trade-in transaction.
So you need to look into two places.
Customer: replied 1 year ago.

should I delete and reenter both cars? I deleted the sold car and am reentering it. A section askes if I own car, lease car, no it isnt mine. Since its sold do I say it isnt mine or say own it since I owned it during 2012 and used it for biz

Expert:  Lev replied 1 year ago.
If you are trying to re-enter information about your cars - I suggest do that for both cars and look very careful for all questions. Do not skip questions.
When you report the sold car - you will be asked the sale date and if it was used for business.
Customer: replied 1 year ago.

TT is asking me right off the bat do i own the car, do i lease the car, or "the car isnt mine." TT does not know I sold is, so do I say I own it even though I sold it?

 

Expert:  Lev replied 1 year ago.
For the car on which you claim mileage - yes - you own the car.
There are different deduction rules for leased car and for the car you do not own.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22750
Experience: Taxes, Immigration, Labor Relations
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