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Partial asset disposition - trees


mekCPA

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Because of the drought and watering restirctions in California, many farmers are forced to let 30% or more of their crops die or pay for water at higher "tier" levels.

As a result, one of my tax clients has reduced their orange tree farm from 198 trees to 108.

I am trying to figure out the best way to "dispose" of those 90 trees. They are currently listed as an Asset on the Asset Entry form as 198 Valencia Orange Trees with a date placed in service of 1/23/04 and a life of 10 years.

I can think of all kinds of "creative" ways to dispose of them to get to the number I want and to make sure the cost and accumulated depreciation carryforward to 2010 at the correct amounts.

But, is there a simple way within ATX to accomplish this? Any help is greatly appreciated!

Marlene

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Here is how I learned it when I was a grunt in the accounting firm.

Setup a second asset called ".....90 Disposed". Modify the first one by adding the words "108 remaining."

Prorate the cost, accumulated depr etc and proceed as normal.

I use this method for purchased breeding stock (cattle) and leave unused asset numbers below the original purchase so the disposals show up on the schedule right below. I keep permanent asset detail on another program (Easy-ACCT) but think this method would work on ATX

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Thanks for the tips, I shall try that out. I had not thought about setting up a "disposed" asset in the method I was considering. I think your method of doing that makes it a lot more clear and leaves a lot better trail should anyone other than me be looking at this year's information or preparing a future year's return.

Thanks, again!

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"Question: Patience Scrivener, a rising star among tax preparers, is known for getting her tasks done quickly and efficiently. She has prepared the returns for Acme Machine for the past five years. In 2007 Acme purchased four new machines for $100,000 each. To save record keeping time, Patience recommended that Acme group the four machines and depreciate them under the General Asset Account (GAA) rules for five year property. Unfortunately, business slowed down and Acme had to sell two of the machines for $10,000 each at the end of 2008 to raise cash. The machines which were sold had accumulated depreciation of $52,000 per machine, with a remaining basis of $48,000 per machine. How are the realized losses of $38,000 per machine reported in 2008?

Answer: The realized losses are not reported. Acme must report ordinary income of $10,000 per machine on Form 4797 in 2008. The machine sales are reported showing a cost basis of zero. The group of assets is depreciated in future years as if the sale of the two machines had never occurred. According to IRS Publication 946, How to Depreciate Property: when you dispose of property included in a GAA, neither the unadjusted depreciable basis, nor the depreciation reserve account of the GAA, is affected. You continue to depreciate the account as if the disposition had not occurred. The property is treated as having an adjusted basis of zero, so you cannot realize a loss on the disposition. Any amount realized on the disposition is treated as ordinary income, up to the total of the unadjusted depreciable bases of all the property in the GAA."

The question and answer above is from NATP's You Make the Call feature in their weekly newsletter. According to them, if you have grouped everything as one asset, you are stuck with that and cannot make a partial disposition.

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"Question: Patience Scrivener, a rising star among tax preparers, is known for getting her tasks done quickly and efficiently. She has prepared the returns for Acme Machine for the past five years. In 2007 Acme purchased four new machines for $100,000 each. To save record keeping time, Patience recommended that Acme group the four machines and depreciate them under the General Asset Account (GAA) rules for five year property. Unfortunately, business slowed down and Acme had to sell two of the machines for $10,000 each at the end of 2008 to raise cash. The machines which were sold had accumulated depreciation of $52,000 per machine, with a remaining basis of $48,000 per machine. How are the realized losses of $38,000 per machine reported in 2008?

Answer: The realized losses are not reported. Acme must report ordinary income of $10,000 per machine on Form 4797 in 2008. The machine sales are reported showing a cost basis of zero. The group of assets is depreciated in future years as if the sale of the two machines had never occurred. According to IRS Publication 946, How to Depreciate Property: when you dispose of property included in a GAA, neither the unadjusted depreciable basis, nor the depreciation reserve account of the GAA, is affected. You continue to depreciate the account as if the disposition had not occurred. The property is treated as having an adjusted basis of zero, so you cannot realize a loss on the disposition. Any amount realized on the disposition is treated as ordinary income, up to the total of the unadjusted depreciable bases of all the property in the GAA."

The question and answer above is from NATP's You Make the Call feature in their weekly newsletter. According to them, if you have grouped everything as one asset, you are stuck with that and cannot make a partial disposition.

Thanks for this information. I read publication 946 on GAAs, and did not find any exclusions for farming or depreciable trees, so that is what I am going to go with. It makes sense when you think about how the IRS handles other tax issues.

I really appreciate your response to this and it helped me "get one more done".

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