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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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I operate a sole proprietorship. I need to purchase a piece

Customer Question

i operate a sole proprietorship. I need to purchase a piece of equipment for $25,000 from another small company and was gong to pay for it with $5,000 check and tools that I own that have a fair market value of $20k. Those tools were not bought as a business expense as they were ones I owned before I started this business. How do I document the 25,000 expense for the IRS
Submitted: 5 months ago.
Category: Tax
Expert:  Lev replied 5 months ago.
You would need to treat that as separate transactions - the selling of tools for $20k and purchase the piece of equipment for $25k.As a result - you might have a gain on disposition of tools.If you do have a gain - you might be able to defer that gain by using so-called section 1031 exchange.If there is no gain - there is nothing to worry about additional taxable income.Questions?
Customer: replied 5 months ago.
Can't be part of a barter exchange?
Expert:  Lev replied 5 months ago.
but that would NOT provide any tax advantages...You must include in gross income in the year of receipt the fair market value of goods or services received from bartering.See here you barter, you should know that the value of products or services from bartering is taxable income. This is true even if you are not in business..So - the first step in such situation - verify if there is any gain.If yes - then to verify if such exchange qualifies fro section 1031 like kind exchange.
Customer: replied 5 months ago.
what if I don't have receipts for the equipment that I purchased as most of the tools are over 10 years old.. the other party is an expert in evaluation of tools as a licensed machinist- We are sure that the original cost of those tools well exceeds the current fair market value he is assigning to them as part of the trade.
Customer: replied 5 months ago.
if not that trade, what other way would I be able to deduct in sec 179 the total cost of the new equipment?
Expert:  Lev replied 5 months ago.
You might need receipts if audited.To calculate your gain - if you know or estimate the purchase price - you may use that.Another issue - if tools were purchased long ago - we need to verify if they were deprecated? - if yes - your basis is zero.You might have issues if the auditor disagree with your evaluation and you have no purchase proof.In this case - we may not predict the outcome..Besides determination of the gain or loss on the disposition of tools - you may recover the purchase cost of the new equipment.Generally via depreciation, but you might be eligible for section 179 deduction as well.See here If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid.
Customer: replied 5 months ago.
anything in section 179 must be paid for in cash or cash equivalent?
Customer: replied 5 months ago.
what if the seller asks me to buy something for him with my accounts since I get very good pricing and I transfer that property to him directly actually shipped to his address under his name but I pay for it- can those expenses be considered cash equivalent?
Expert:  Lev replied 5 months ago.
You may review all requirements for section 179 deduction in referenced publication.If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct.We will not just use the "considered cash equivalent" - you will report the disposition of tools and purchase of the equipment as separate transactions.
Expert:  Lev replied 5 months ago.
Specifically - see PDF version here 2. Electing the Section 179 Deduction on pages 15-24Please be aware - as that is not a new equipment - it would not qualify for bonus depreciation.Let me know if you need any clarification this matter.
Customer: replied 5 months ago.
what is the "bonus deprecation"?
Expert:  Lev replied 5 months ago.
You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2015, you can take an additional 50% special allowance.That is sometime referred as "bonus depreciation"To qualify - you must have acquired the property by purchase and that must be a NEW property (not just new for you)For details - see referenced publication - chapter 3. Claiming the Special Depreciation Allowance.