Tax question on trading in a tractor

[jhwis]

I do my own taxes, so just asking a hypothetical question that someone might know the answer to. If I trade in a fully depreciated 50k tractor for a different 50k tractor I understand I report 50k (old tractor) as an ordinary gain. I can then fully deduct the 50k (new tractor) with Section 179 in same tax year, correct? Basically making it a wash.

 

[37chief]

That's the reason I don't do my own taxes. Sorry can't help. Stan

 

[plattman]

I do my own taxes, so just asking a hypothetical question that someone might know the answer to. If I trade in a fully depreciated 50k tractor for a different 50k tractor I understand I report 50k (old tractor) as an ordinary gain. I can then fully deduct the 50k (new tractor) with Section 179 in same tax year, correct? Basically making it a wash.

Correct on the old tractor. Check the section 179 for possible limitations on deductibility, like income limitations.

 

[jhwis]

Correct on the old tractor. Check the section 179 for possible limitations on deductibility, like income limitations.

Ok, Thanks. I've never used Section 179 before. Section 179 deduction is limited to business income. I usually break about even on a typical year, so it would work i think as the depreciation recapture amount of the old tractor (50k) would be the profit for the year and thus would allow the new tractor (50k) to be deducted completely in same tax year. This assumes it's a straight up trade which it roughly be i think. That's how I see it anyway.

 

[miangus]

If you are using a cash basis for your business and trade one tractor directly for another there is no cash income. But don't take depreciation expense on the new tractor. Warning taking tax advice from an old farmer like me may land you in jail.

 

[jhwis]

If you are using a cash basis for your business and trade one tractor directly for another there is no cash income. But don't take depreciation expense on the new tractor. Warning taking tax advice from an old farmer like me may land you in jail.

Yeah, that's how it used to be before 2018. TCJA elimnated that. You gotta report recapture on a trade and either depreciate new tractor or use Section 179. I'm not an accountant...I only play one on this website.

 

[Texasmark]

If you are using a cash basis for your business and trade one tractor directly for another there is no cash income. But don't take depreciation expense on the new tractor. Warning taking tax advice from an old farmer like me may land you in jail.

You depreciated the value of the old tractor to zero. You traded in zero value for a $50k liability. In today's tax code you have 5 years to recover that expense (depreciation on current income) if the purchased tractor is new, or 7 years if it is used. Had you sold it, whatever you received in payment from the buyer would have been business (ordinary) income. That's the way I read the tax code and never had any questions asked.

 

[jhwis]

Correct. That is one option. You can also expense it all in one year with section 179, thus making it a wash. That is how I read it. There are limitations on Section 179 such as deduction can't exceed business income, so if you are taking a loss for the tax year, you can't use Section 179 on the exchange.

 

[TheBartman47]

I section 179 all my equipment every year, but I've never sold any used equipment to recapture capital, and I don't know if there's any difference being a tractor vs other ordinary equipment. I know a vehicle can't use section 179, nor can land, but I think a tractor can be treated as ordinary equipment. I think the sale of your old tractor would be basically counted as income, just like if you had sold a cow or a crop. You're probably best to ask a CPA for a definitive answer. Or, maybe AI could help. Type up a detailed question with all the pertinent information for your situation and see what it spits out. It will probably be accurate since AI training includes all IRS codes.

 

[jhwis]

I section 179 all my equipment every year, but I've never sold any used equipment to recapture capital, and I don't know if there's any difference being a tractor vs other ordinary equipment. I know a vehicle can't use section 179, nor can land, but I think a tractor can be treated as ordinary equipment. I think the sale of your old tractor would be basically counted as income, just like if you had sold a cow or a crop. You're probably best to ask a CPA for a definitive answer. Or, maybe AI could help. Type up a detailed question with all the pertinent information for your situation and see what it spits out. It will probably be accurate since AI training includes all IRS codes.

I assume you must not ever report a loss for the year? You can only use Section 179 to deduct up to your business income. For example, If you break even....you can't use any section 179 deduction that tax year. If you make 25k, you can only deduct up to 25k using Section 179.

 

[TheBartman47]

I assume you must not ever report a loss for the year? You can only use Section 179 to deduct up to your business income. For example, If you break even....you can't use any section 179 deduction that tax year. If you make 25k, you can only deduct up to 25k using Section 179.

I have a Schedule C loss most years, but I have a W2 day job which compensates for that section 179 limitation. If you do hit your 179 limit, you can still carry-over the loss to next year's return.

 

[jhwis]

I have a Schedule C loss most years, but I have a W2 day job which compensates for that section 179 limitation. If you do hit your 179 limit, you can still carry-over the loss to next year's return.

Good information. I believe it says the income is supposed to come from that specific business/trade to be used for section 179, so I wouldn't think a W2 job would increase the limitation? (Maybe it is overall taxable income they are referring to) You don't report the sale of machinery on schedule F which is mainly why I have a question. AI seems to say it is treated as a business income even though it is listed on form 4797 and not specifically schedule F.

 

[rustred]

and if you check in with an accountant ,i wonder what he will say compared to this coffee shop.

 

[jhwis]

and if you check in with an accountant ,i wonder what he will say compared to this coffee shop.

But I like this coffee shop.

 

[Tony in SD]

If I wanted to know the answer to your question, the only person I would trust for the correct answer would be my CPA.

 

[Texasmark]

If I wanted to know the answer to your question, the only person I would trust for the correct answer would be my CPA.

I tried a CPA twice (different offices) out of decades of doing my own taxes. Both times I had problems that I didn't cause. The first one was a city accountant who really had no idea as to how one runs a farm, and the second's hired help made errors the owner (CPA) that checks things before they go out the door missed.

 

[jhwis]

No doubt a good CPA would prolly have the answers. I kinda like doing things on my own if possible. Like Texasmark said I know how I run my farm, so it's easier if I do it. (It's not that big of an operation) This isn't terribly complicated, just thought someone might have had the same experience.

 

[TheBartman47]

You can ask 10 different CPAs and get 11 different answers. The tax code is written in such a way as to be deliberately convoluted.

 

[jhwis]

You can ask 10 different CPAs and get 11 different answers. The tax code is written in such a way as to be deliberately convoluted.

Nailed it.

 

[Tony in SD]

I tried a CPA twice (different offices) out of decades of doing my own taxes. Both times I had problems that I didn't cause. The first one was a city accountant who really had no idea as to how one runs a farm, and the second's hired help made errors the owner (CPA) that checks things before they go out the door missed.

CPAs are like any other occupation. You need to hire one that specializes in your occupation. In your case someone that understands farming. Just as I would not hire lawyer that practices family law to write a business contract nor would I hire an Oncologist to deliver my baby. I have only had 2 CPAs in my life time. The only reason I had 2 was the elder CPA retired. The point is that both of them know my business and my business history. One other thing. I would not want to be audited without a good CPA on my side of the table. BTDT