How to handle taxes on a fully depreciated business vehicle sold the next year?

What you're referring to is called "depreciation recapture." When you sell a business asset that you've previously depreciated, the IRS wants to recapture some of the tax benefit you received. Since you fully depreciated the vehicle, the difference between your sale price ($132k) and your adjusted basis (which is $0 since you fully depreciated it) is subject to tax. However, it's not all treated as regular income. The gain is generally taxed in two parts: 1) The portion equal to the depreciation you took is taxed as ordinary income but capped at a 25% rate (this is the "recapture"), and 2) Any excess is taxed as capital gain. As for the business showing a loss - that's certainly a consideration for mortgage applications. Lenders typically look at a 2-year average of your income, so this temporary dip might impact your borrowing capacity. You might want to speak with a mortgage broker about your specific situation before applying.

After struggling with a similar depreciation recapture situation last year, I discovered taxr.ai (https://taxr.ai) and it was honestly a game-changer. I uploaded my depreciation schedule and sale documents, and it broke down exactly how much recapture tax I'd owe and explained the whole Section 1245 vs Section 1250 property distinction that my previous accountant had messed up. The tool actually showed me that my CPA had miscalculated my basis, and I ended up saving about $7k in taxes. It also generated a really clear explanation that I could share with my new accountant about my specific vehicle depreciation situation.

Just wanted to update that I tried taxr.ai after reading about it here and it was extremely helpful! I uploaded my equipment purchase documents and the sales agreement from when I sold them. The system immediately identified that I had taken Section 179 deduction on the equipment and explained exactly how recapture would work. It showed me that I'd need to file Form 4797 and clarified that the recapture would be taxed as ordinary income, not the 25% rate (which apparently only applies to real property). The explanation helped me understand why my tax bill was going to be higher than I expected, but at least now I can plan for it instead of being shocked at tax time. Really glad I found this tool before filing my 2023 taxes!

After dealing with a similar situation with depreciation recapture on business assets, I tried calling the IRS for clarification but kept getting stuck in their phone system for hours. Eventually found Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c) - they actually got me connected to a real IRS agent in about 20 minutes. The agent walked me through exactly how the depreciation recapture would be reported on my tax return and confirmed I needed to use Form 4797. They explained that the recapture amount would be taxed at my ordinary income rate (not automatically 25% like I feared). Having that official clarification directly from the IRS gave me peace of mind and saved me from overpaying.

I need to eat my words and update everyone. After my skeptical comment, I decided to try Claimyr anyway out of desperation. I've been trying to get clear answers about a complex depreciation recapture situation for months. The service actually worked exactly as described - I got a call back in about 35 minutes and was connected with an IRS agent who specialized in business returns. She walked me through the exact reporting requirements for my situation and confirmed that I had been calculating my recapture incorrectly. Turns out I was potentially OVERPAYING by treating all my gain as recapture when some should have been capital gain. The agent even emailed me specific IRS publications that addressed my situation. I'm honestly shocked at how helpful they were once I actually got through. Worth every penny to finally get this resolved.

Just to add some clarity on the vehicle depreciation situation - the tax treatment depends on what method of depreciation you used. If you used Section 179 expensing to fully deduct the vehicle in 2022, then yes, when you sell it, the entire amount you receive is technically "recapture" and taxable, but not necessarily at 25%. For most business vehicles, it's taxed at your ordinary income rate. The 25% rate typically applies to real property depreciation recapture, not vehicles (which are Section 1245 property, not Section 1250 property).

Has anyone considered the implications for the Qualified Business Income deduction (QBI)? When you take large depreciation in one year and then have recapture income the next, it can really mess with your 20% QBI deduction calculation. In my case, the massive depreciation lowered my business income too much to get much QBI benefit in year 1, and then the recapture income in year 2 didn't qualify for QBI at all since it's not considered business income for QBI purposes. Basically lost out on a potential 20% deduction on a large chunk of income.

I went through almost the exact same situation with a business truck I bought in 2021! My accountant also recommended full depreciation through Section 179, but didn't really explain the recapture consequences clearly. When I sold it the following year, I was hit with a pretty significant tax bill. The key thing to understand is that depreciation recapture on vehicles (Section 1245 property) is taxed at your ordinary income rate, not the 25% rate that applies to real estate. So if you're in a high tax bracket, it can be painful. One thing that helped me with the mortgage situation was getting a letter from my CPA explaining that the business loss was due to a one-time depreciation event and providing projections showing normalized income going forward. Some lenders are more understanding of these situations than others, so it might be worth shopping around or working with a broker who has experience with self-employed borrowers. The silver lining is that this is really just a timing issue - you got a big tax deduction in 2022 and now you're paying it back in 2023. The net effect over the two years isn't as bad as it initially seems when you just look at the 2023 tax hit in isolation.

I'm dealing with a similar depreciation recapture situation right now and wanted to share what I've learned from my research and conversations with tax professionals. The good news is that your CPA wasn't necessarily wrong about the tax treatment - depreciation recapture on vehicles is indeed taxed as ordinary income, but the effective rate depends on your overall tax bracket. It's not automatically 25% like some online sources suggest (that rate applies to real estate depreciation recapture under Section 1250). For your mortgage situation, I'd recommend being proactive with documentation. Prepare a clear narrative explaining the business decision to take accelerated depreciation in 2022 and how the sale in 2023 was a one-time event. Include your business financials showing normal operations before and after these events. Many lenders have seen this pattern with business owners and understand it's a timing difference, not a fundamental income problem. One strategy that might help is to provide year-to-date 2024 financials (if available) showing your business income has returned to normal levels. This can help demonstrate that the 2023 recapture was truly a one-time event and not indicative of ongoing business performance issues. The key is presenting it as a strategic tax planning decision rather than a mistake or unexpected windfall, which shows financial sophistication to lenders.

I went through a very similar situation and can share some insights from my experience. Your CPA was partially correct about the tax treatment, but may not have fully explained the magnitude of the tax impact when you sell. When you fully depreciate a business vehicle and then sell it, you're looking at depreciation recapture under Section 1245. The entire sale proceeds ($132k in your case) become taxable income since your adjusted basis is now $0. This will be taxed at your ordinary income rates, not capital gains rates. The timing strategy your CPA used might still make sense depending on your tax situation in 2022 vs 2023. If you were in a higher bracket in 2022, the large deduction could have saved you more than you'll pay in recapture taxes in 2023. For the mortgage situation, I'd strongly recommend working with a mortgage broker who has experience with self-employed borrowers. They can help you present your situation properly to lenders. The key is documentation - get a detailed letter from your CPA explaining that this was a strategic tax decision, not poor business performance. Include projections showing normalized income going forward. Some lenders are definitely more sophisticated about understanding business depreciation strategies than others. Community banks and credit unions sometimes have more flexibility in their underwriting compared to big banks that rely heavily on automated systems. Consider waiting to apply until you can show both the 2022 depreciation and 2023 recapture together - this tells a complete story rather than just showing a business loss without context.

I've been following this thread with great interest as I'm currently dealing with a similar depreciation recapture situation. One aspect that hasn't been mentioned much is the impact on quarterly estimated tax payments. When you have a large recapture event like this, it can throw off your estimated payments for the current year if you're not careful. I learned this the hard way when I sold some fully depreciated equipment and got hit with underpayment penalties because I hadn't adjusted my quarterlies to account for the recapture income. The IRS expects you to pay as you go, so if you're facing a significant recapture tax bill, make sure to increase your estimated payments for the remaining quarters of 2023 (if you haven't filed yet) or plan accordingly for 2024 if this situation repeats. Also, regarding the mortgage situation - one thing that helped me was providing a detailed business plan showing how the equipment sale and depreciation strategy fit into our overall business strategy. Lenders appreciated seeing that this was part of a deliberate plan to optimize our tax situation and business operations, not just random financial volatility. The documentation really is key - treat it like you're telling a coherent business story rather than just explaining away unusual numbers.

I'm dealing with a somewhat similar situation and wanted to share a perspective that might help with the mortgage aspect. When I went through underwriting last year after taking Section 179 depreciation, my loan officer suggested providing what she called a "business income normalization worksheet." This document showed my average business income over 3-5 years, then explained how the depreciation and recapture were timing differences that didn't reflect my actual earning capacity. We included the depreciation benefit I received in 2022 and the recapture I'd pay in 2023, essentially showing the net effect was much smaller than either number alone suggested. What really helped was demonstrating that my business cash flow remained strong throughout - the depreciation was a tax strategy, not a reflection of business performance. I provided bank statements showing consistent business deposits and highlighted that the vehicle sale actually improved our cash position. The underwriter appreciated seeing that we understood the tax implications upfront rather than being surprised by them. They ultimately approved the loan using an average income calculation that smoothed out the depreciation timing difference. One thing I'd recommend is getting pre-qualified with multiple lenders before you find a house. This gives you time to explain your situation without the pressure of a purchase contract deadline, and you can see which lenders are most comfortable with your scenario before you're committed to working with them.

I'm in a very similar situation and this thread has been incredibly helpful! I took Section 179 depreciation on business equipment in 2022 and am now facing the recapture consequences after selling in 2023. One thing I learned from my tax attorney that might be relevant - if you're married filing jointly, the recapture income gets added to your combined income, which could potentially push you into a higher tax bracket than you were expecting. Make sure to run the numbers on your total household income when calculating the tax impact. Also, for the mortgage situation, I found that providing a simple one-page summary helped a lot. It showed: (1) Normal business income 2020-2021, (2) 2022 income with depreciation benefit, (3) 2023 projected income with recapture, and (4) 2024+ projected normalized income. This timeline format made it really clear to lenders that this was a temporary timing issue, not a fundamental change in our earning capacity. The key is being proactive about the narrative rather than letting lenders draw their own conclusions from the numbers alone.