Can a fully-depreciated asset be placed into service in a new entity without a sale transfer?

Forum|Forum|2 years ago
November 10, 2023
4 replies
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I own a vehicle and have elected to take depreciation on it in my sole proprietorship. I intend to close the sole proprietorship, and continue personal use of the vehicle.

If I create a new single-member LLC, can I place the same vehicle into service in the new entity and start taking depreciation on it?

Not A Product Question

Best answer by Rick19744

@Opus 17 stated:

The basis of depreciation for the asset when placed in service with the new business is either the fair market value at the time, or the adjusted cost basis, whichever is less.

This is not correct, as based on these facts, there was business use and prior depreciation taken.

The basis of contributed property, in this example, is the same as it is in the hands of the contributor; adjusted basis.

There will be absolutely no change in the basis of property contributed to a single-member LLC, if the single member LLC is disregarded. As a result of being disregarded, it is as if the contributor contributed property to themself; there is no entity for federal income tax.

Based on your facts, as noted by @Mike9241 , since it is already fully depreciated, you will have zero adjusted tax basis.

Mike9241

there is no sale when you close the sole proprietorship. already having a zero tax basis you can't depreciate it.

Opus 17

Employee

The basis of depreciation for the asset when placed in service with the new business is either the fair market value at the time, or the adjusted cost basis, whichever is less. Since the property is fully depreciated, your adjusted cost basis is zero.

Rick19744Answer

Employee

@Opus 17 stated:

The basis of depreciation for the asset when placed in service with the new business is either the fair market value at the time, or the adjusted cost basis, whichever is less.

This is not correct, as based on these facts, there was business use and prior depreciation taken.

The basis of contributed property, in this example, is the same as it is in the hands of the contributor; adjusted basis.

Based on your facts, as noted by @Mike9241 , since it is already fully depreciated, you will have zero adjusted tax basis.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

Carl11_2

Employee

If I create a new single-member LLC, can I place the same vehicle into service in the new entity and start taking depreciation on it?

No. It was fully depreciated in a prior sole proprietor business that you owned and closed without disposing of the vehicle in a fully taxable transaction. With a cost basis of ZERO in the new single member LLC, there is nothing to depreciate.

However, unless there is something I'm not aware of, you can still take the per-mile deduction for each business mile driven with the vehicle. You'll need to keep finely detailed mileage records to support your claim, should you ever be audited.

Anonymous_

Employee

@Carl11_2 wrote:
.....you can still take the per-mile deduction for each business mile driven with the vehicle.

I don't think that will work - See @Mike9241's post re using actual expenses (and depreciation deductions).

The standard mileage rate includes a depreciation component and this vehicle has an adjusted basis of $0 as a result of previous depreciation deductions.

Carl11_2

Employee

@Anonymous_ I've never been able to find anything that says you can't take the per-mile deduction after the vehicle is fully depreciated. I used the per-mile on my truck for about 15 years, and there's no question I fully depreciated it well before I sold the truck. Now when I sold it, I did use a cost basis of $0 since there was no doubt it was already fully depreciated. But even after fully depreciating it with the per-mile deduction, I found nothing saying I could not continue to use the full amount per-mile with the per-mile deduction.

Mike9241

@amend20201 if you at any time used the actual expense method which it seems you did, you can not switch to the standard mileage method. I don't think it matters that the vehicle will be used in a new business.