changing asset from sch c to sch f

[Marie]

Building was a 39 year asset when used for mfg building.  business has moved and building is now being used for farm purposes, 20 year property.  How do I change?

[jklcpa]

Here's section 1.168(i)-4  that covers change in use and describes the method in your client's circumstance. The change is assumed to be on the first day of the tax year, and you will use the adjusted depreciable basis.  The page at Cornell Law that I linked to has additional clickable links for definitions if you need them and describes the proper reporting when the new MACRS method has a shorter life than before, or a longer one.

[Pacun]

Are you talking about numbers and figures or how to manipulate the asset in ATX?

[jklcpa]

On 8/22/2019 at 10:37 PM, Pacun said:

Are you talking about numbers and figures or how to manipulate the asset in ATX?

Marie didn't specify if the manufacturing and farming activities are both on the same return, and I haven't used ATX in a while, but even if it is, this is not going to be as simple as manipulating the existing asset by moving it over to the farming activity. The asset(s) involved should be taken out of service from the mfg activity and reentered for the farming activity because its initial depreciable basis will be different than it was in the former activity, and this may possibly require some overrides or additional entries for it and other assets in service during the year.  

The preparer needs to read the section I linked to carefully and not rely solely on what I'll summarize next, but here goes: 

• the asset basis for depreciation is the adjusted depreciable basis, not its former depreciable basis in mfg activity
• in service in the year of change, and use a short year if the farming activity started later,
• this asset isn't eligible for bonus depreciation or sec 179, and
• its basis is excluded for purposes of determining whether any OTHER assets acquired during the year are subject to the mid-quarter convention rules. (not sure if ATX has specific input to handle this automatically)

Finally, under sec 1.168(i)-4(d)(3)(ii), it is possible to ELECT to determine the depreciation as if the change had not occurred at all. 

[Marie]

same return, sole prop for both mfg and farm.  building was vacated by mfg business on Apr 1, and used as farm building immediately afterwards. 

So, I take the original cost minus depreciation taken as mfg business, and that will be my basis for depreciation for the farm?  20 year building, no 179 or bonus.

[Lee B]

I would enter original cost plus improvements for the depreciable basis and carryover the accumulated depreciation.

I believe changing the basis or the accumulated depreciation would be incorrect.

You have a change of method on an existing asset not a new asset.

 

[jklcpa]

1 hour ago, cbslee said:

I would enter original cost plus improvements for the depreciable basis and carryover the accumulated depreciation.

I believe changing the basis or the accumulated depreciation would be incorrect.

You have a change of method on an existing asset not a new asset.

 

I don't agree with either of those statements.  The code is clear that it is calculated on adjusted depreciable basis, not original cost plus improvements.  It's also clear that it's as if placed in service during the year of change.

• sec 1.168(i)-4(d)(3)(i)(A):
• (A)In general. If a change in the use results in the MACRS property changing to a shorter recovery period and/or a depreciation method that is more accelerated than the method used for the MACRS property before the change in the use, the depreciation allowances beginning in the year of change are determined as though the MACRS property is placed in service by the taxpayer in the year of change.

Here's the part where it says that adjusted depreciable basis is to be used to calculate the depreciation deduction for the new activity, so it would be incorrect to calculate on original cost plus improvements without reducing it by deprecation already taken.  How will the software accomplish the correct calculation on adjusted basis if the existing amounts are carried over?

• sec 1.168(i)-4(d)(3)(i)(B):
• (B)Computation of depreciation allowance. The depreciation allowances for the MACRS property for any 12-month taxable year beginning with the year of change are determined by multiplying the ADJUSTED depreciable basis of the MACRS property as of the first day of each taxable year by the applicable depreciation rate for each taxable year. In determining the applicable depreciation rate for the year of change and subsequent taxable years, the taxpayer must use any applicable depreciation method and recovery period prescribed under section 168 for the MACRS property in the year of change, consistent with any election made under section 168 by the taxpayer for that year (see, for example, section 168(b)(5)). If there is a change in the use of MACRS property, the applicable convention that applies to the MACRS property is the same as the convention that applied before the change in the use of the MACRS property. However, the depreciation allowance for the year of change for the MACRS property is determined without applying the applicable convention, unless the MACRS property is disposed of during the year of change. See paragraph (d)(5) of this section for the rules relating to the computation of the depreciation allowance under the optional depreciation tables. If the year of change or any subsequent taxable year is less than 12 months, the depreciation allowance determined under this paragraph (d)(3)(i) must be adjusted for a short taxable year (for further guidance, for example, see Rev. Proc. 89-15 (1989-1 C.B. 816) (see § 601.601(d)(2)(ii)(b) of this chapter)).

 

 

[Lee B]

I stand corrected with egg on my face. This situation is a perfect example of how difficult it is to prepare returns correctly and why so often

we see mistakes on returns prepared by other preparers.

 

[jklcpa]

2 hours ago, cbslee said:

I stand corrected with egg on my face. This situation is a perfect example of how difficult it is to prepare returns correctly and why so often

we see mistakes on returns prepared by other preparers.

 

No worries. We've all been there, and I've eaten my share of egg, more lately than ever.

Someday soon I'll explain why I've been MIA more, not that that's all bad, and have had some fuzzy thoughts on some answers too. 

[Bart]

I love eggs

[Marie]

THANKS TO ALL