Many taxpayers assume that selling business equipment has the same income tax consequences as ordinary activities of an entrepreneur's company. However, an important aspect of any tax preparer job involving business equipment sales is identifying details about a sale.
The tax impact is different for a proprietor who trades in equipment instead of selling it with a separate transaction from a replacement purchase. Explaining the effect upon taxpayers is a common step in tax preparer work.
A trade-in permits a business owner to defer recognizing taxable gain. For example, a doctor may trade in an old fully-depreciated ultrasound machine. He acquires a new ultrasound machine with a cost of $150,000. No gain is calculated by his registered tax return preparer. But a sale first of the old machine for $100,000 creates a gain for the amount realized.
The gain or loss from selling business equipment is reported on Form 4797. Any cost basis that has not been depreciated is subtracted from sales proceeds in determining the gain or loss. A subsequent purchase of new equipment creates another starting basis. This allows a calculation of depreciation or Section 179 deduction using the RTRP training of the business owner's tax practitioner.
Our fictional doctor increases the basis for depreciation by avoiding the trade-in situation. The full $150,000 purchase price is eligible for depreciation. A trade-in arrangement giving the doctor an exchange value of $100,000 leaves only $50,000 of purchase price for the new equipment to depreciate.
The results addressed in tax preparation study indicate that depreciation and Section 179 are expenses that reduce self-employment income. Therefore, depreciating $150,000 provides a considerable benefit to the taxpayer compared to depreciation of only $50,000. Having more cost for depreciation simply requires not using a trade-in. Instead, the equipment is sold for a gain reported by tax return preparation on Form 4797. Using Section 179 and bonus depreciation will permit expensing of the entire $150,000 cost for new equipment in the first year.
The offset therefore of incurring a reportable gain on Form 4797 is having no trade-in. This increases depreciable basis for new equipment purchased. The reduction in business profit from the depreciation and Section 179 expense also lowers the associated self-employment tax. The gain on Form 4797 is not subject to self-employment tax.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
The tax impact is different for a proprietor who trades in equipment instead of selling it with a separate transaction from a replacement purchase. Explaining the effect upon taxpayers is a common step in tax preparer work.
A trade-in permits a business owner to defer recognizing taxable gain. For example, a doctor may trade in an old fully-depreciated ultrasound machine. He acquires a new ultrasound machine with a cost of $150,000. No gain is calculated by his registered tax return preparer. But a sale first of the old machine for $100,000 creates a gain for the amount realized.
The gain or loss from selling business equipment is reported on Form 4797. Any cost basis that has not been depreciated is subtracted from sales proceeds in determining the gain or loss. A subsequent purchase of new equipment creates another starting basis. This allows a calculation of depreciation or Section 179 deduction using the RTRP training of the business owner's tax practitioner.
Our fictional doctor increases the basis for depreciation by avoiding the trade-in situation. The full $150,000 purchase price is eligible for depreciation. A trade-in arrangement giving the doctor an exchange value of $100,000 leaves only $50,000 of purchase price for the new equipment to depreciate.
The results addressed in tax preparation study indicate that depreciation and Section 179 are expenses that reduce self-employment income. Therefore, depreciating $150,000 provides a considerable benefit to the taxpayer compared to depreciation of only $50,000. Having more cost for depreciation simply requires not using a trade-in. Instead, the equipment is sold for a gain reported by tax return preparation on Form 4797. Using Section 179 and bonus depreciation will permit expensing of the entire $150,000 cost for new equipment in the first year.
The offset therefore of incurring a reportable gain on Form 4797 is having no trade-in. This increases depreciable basis for new equipment purchased. The reduction in business profit from the depreciation and Section 179 expense also lowers the associated self-employment tax. The gain on Form 4797 is not subject to self-employment tax.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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