Converting Depreciable Assets

[jmallard]

Hi,

I have a client who converted a computer system to personal use. I noted the conversion in Asset Manager and the date, so no depreciation was shown or taken for this item in 2007.

I'm not very knowledgeable about recapture rules so I was wondering what happens to this asset ?

Do I have to recapture previously deducted depreciation on this item when the client makes a final disposition ?

What if he just throws the computer away (or disposes through proper "green" chanels) or gives to Goodwill (with no intent of claiming a charitable deduction) ?

This subject brings up a general question about depreciation for me.

I've been in business since 1984, Taxes primiarily, and I still have most every computer, printer, & depreciable accessory I ever bought (yes, I'm a pack rat). I have never reported a disposition on any of these items. Just dropped from depreciation list after useful life. However, I did sell and replace a few items and did the "like in kind" exchanges.

When I die and/or go out of business and my wife gives all this stuff to charity (for no deduction) is the IRS going to come back and say she has to claim all the depreciation on the business equipment as income ?

Take our ATX tax software (or any business software), after depreciating for 3 years, are we supposed to recapture the depreciation ? I still have all the CDs, Tax Books, etc. The software is not really converted to personal use or anything, I just still have it.

Thanks in advance!

Jerry

[kcjenkins]

Well, the assets you own, that she inherits, would have a step up in basis to FMV at that time. The software, once the three years is up, is not subject to recapture, any more than any other fully depreciated assets are. It's only those that are sold or converted before they are fully depreciated that are subject to recapture.

But yes, if you convert equipment EARLY, then you would recapture, according to the rules, the §179 at the time of the conversion. See the instructions for that section on the bottom of the second page of the 4797. But your wife will inherit it, so she has nothing to recapture. Hope that helps.

[Kea]

As for the tax software, I've treated it as a "supply" because it's useful life is basically one year. Yes, you can use it in future years if you need to, but it's possible (maybe not likely) that you won't have any amendments or late returns after that year. I believe this exception to the 3-year rule applies to tax software and anti-virus software and anything else that has to be renewed each year.

I also count pens and highlighters as supplies, even though some of them have lasted several years.

Gosh, I hope that's not wrong.

[kcjenkins]

I do not think you are wrong. Tax software is one of the types that must be replaced every year, with the old year's programs being of very marginal use. Writing them off each year is totally reasonable.

[jmallard]

Thanks for the responses - appreciated very much.

So, to make sure my pea brain understands this, if I have an item that is fully depreciated, I can just drop it from my list of itemized deductions and if I just throw it away or give to charity (with no deduction), there is no recovery ?

I could buy a new computer system every 5 years and not worry about the old fully depreciated computer ? Convert it to personal use then throw away or give to charity (no deduction) ?

In the case of my client. Has computer system bought in 2002, and depreciated 2002-2005. He bought new computer system Jan 2006, converted the old system to personal use and took no depreciation in 2006. So, 2007 would be the end of the depreciation period, do I have to recover anything or just drop the item from the list of depreciable items ?

I like the idea of considering Tax Software as a one year use item. Except for the rare amendment or someone who did not file that year, I never use the old tax software. I'm going to start writing off the full cost each year. I've been depreciating the tax software for 3 years.

Thanks in advance.

Jerry

[kcjenkins]

That is correct. We normally keep things on the depreciation schedule as long as it is used in the business, because of course, if we SELL it, we need to report the income on the 4797. But if we simply scrap it, or donate it, there is no problem. because there is no income to report.

[jmallard]

kcjenkins

Thanks very much for the information.

I feel much better now

Jerry