Daniel HonanFounder, Profitable Painter CPA PLLC · I help painting contractors increase profits & cash flow while reducing taxes♦ Bookkeeping ♦ Tax

Painting Business Owners: Navigating asset sales or trades.

Name: Painting Business Owners: Navigating asset sales or trades.
Uploaded: 2024-06-25T13:00:09+00:00
Duration: 56 s
Channel: Daniel Honan
Description: In this segment, the speaker explains a commonly overlooked tax consequence for painting business owners when they sell or trade a fully depreciated…

25 Jun 2024 · 1 min

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In this segment, the speaker explains a commonly overlooked tax consequence for painting business owners when they sell or trade a fully depreciated asset, using a pickup truck as an example. If an asset has been fully depreciated and is later sold for a residual value (e.g., $20,000), the owner must recapture the depreciation, meaning the sale proceeds are taxed as ordinary income, potentially pushing the owner into a higher tax bracket. The speaker notes a recent regulatory change that treats trade‑ins the same as outright sales: the trade‑in value is considered a sale price, so depreciation recapture applies to trade‑ins as well. This creates an extra tax liability that owners need to anticipate when planning equipment upgrades or disposals.

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Another thing that gets overlooked a lot when we sell the asset, a lot of times we don't use things up completely. Let's say we buy a pickup truck. If we drive the wheels off of it and it goes to the junkyard, then we don't have anything to worry about because we fully depreciated it. It has no residual value. What happens if we drive it for a few years and then we sell it and say we get $20,000? If we've already depreciated it, then we have to pay back that tax break when we go to sell it. So if it's fully depreciated and we sell it for $20,000, now we're paying taxes on $20,000 and we might be in that higher tax bracket. This also applies if we trade that truck in. Now, it didn't always be this way. This is a recent change. But if you trade your vehicle in to get a new one, whatever the dealer gives you for that vehicle would be the sale price. If we fully depreciated it and the dealer gives us $20,000 for it, we're going to be on the hook for some extra taxes.