Converting a De Minimis safe harbor business expense for personal use

Question

My question is about self-employment business expenses. The De Minimis Safe Harbor election allows us to deduct the expense of items for a business, rather than depreciating them over several years, if the cost of the item is below a certain threshold (currently $2500). I'm wondering how to handle retiring a business asset for personal use.

For context: I am a software engineer, primarily developing video games and other real-time 3D applications. I have a high-end computer in my home office that I wrote off as a single De Minimis expense and only use for work, and a separate older computer in a different room that I use for gaming and personal use. Eventually, I will want to upgrade components in my work computer. Once I upgrade a component, I'll no longer need the old component for work. Because my work computer is newer and more powerful than my gaming computer, I could also swap the component into my gaming computer as an upgrade. I'm not sure what kind of accounting I'd need to do at this point to properly convert the component for personal use.

Simplified hypothetical example: I buy a pre-built work computer as a whole for $2000 and deduct the full cost of the computer as a De Minimis Safe Harbor expense on my taxes for that year. The computer includes a graphics card with a retail value of $500. Three years later, I replace the graphics card with a newer model. The original graphics card, now 3 years old and used, now has a market value of $250. My impression is that at this point I would have a tax obligation to the IRS for this portion of the work computer that is no longer being used for work.

1. My impression is that I could sell the used graphics card for $250, report this sale as a gain and pay taxes on it, and that would cover my tax obligation. Is that correct?

2. What if I put the graphics card into my gaming computer? This would mean I'm using the item for personal use, so presumably I'd still have a tax obligation. My best guess is that I'd "sell" the used graphics card to myself at its current market value of $250, report this as a gain, and pay taxes on it, even though no money actually changed hands. Is that correct? Presumably I'd need some kind of records to prove that I used a fair market value?

Answer 1

My impression is that I could sell the used graphics card for $250, report this sale as a gain and pay taxes on it, and that would cover my tax obligation. Is that correct?

If you sell it and get $250, then given the $0 basis after the depreciation you have gain. It's not capital gain, it's depreciation recapture (IRC Sec. 1245).

What if I put the graphics card into my gaming computer? This would mean I'm using the item for personal use, so presumably I'd still have a tax obligation.

Yes, essentially the same depreciation recapture, except the value is harder to determine.

The interesting question is how much to recapture. How to calculate the gain which is attributable to the part?

You'll need to document how you reached the FMV. You'll need to recalculate allowable depreciation based on the actual period of use. Given that you depreciated the computer as a whole single unit, but are now dealing with one part of it, you'll need to figure out how much of the whole unit to attribute to the part.

Answer 2

The main starting points for thinking about this would be Publication 544 and Form 4797. Both mention property deducted under the de minimis safe harbor and how to report income when it is sold; it seems sale of such property is income, but is not depreciation recapture.

Both also mention property which changes from business use to non-business use, for example "The computation of recapture amounts under sections 179 and 280F(b)(2) of the Internal Revenue Code, when the business use of section 179 or listed property decreases to 50% or less." Your property is not section 179 property. Computers are generally listed property, but not when used in a home office! And anyway I believe that because you used the de minimis safe harbor, recapture would not occur from conversion to personal use even for listed property.

Some other discussion of this on the web:

https://engageadvisors.com/a-helpful-qa-de-minimis-or-179-expensing-or-bonus-depreciation/

• "De minimis expensing does not trigger recapture"

https://bradfordtaxinstitute.com/Content/onvert-Business-Property.aspx

• "Keep these important points in mind when converting a proprietorship or rental property asset to personal use:
• You have no taxable gain or loss at the time of conversion from business to personal use.
• You have a taxable gain or a deductible loss when you sell or otherwise dispose of this previous business asset (after conversion to personal use, the asset retains its previous business attributes, as discussed above).
• At the time of conversion to personal use, you trigger Section 179 expensing recapture, if any.
• At the time of conversion, you trigger Section 280F listed property recapture.
• Avoid selling or gifting to a relative any business assets on which you could otherwise claim a deductible business loss. (You don’t want to lose the loss deduction.)"

My conclusion: conversion of property expensed under the de minimis safe harbor does not result in taxable income of any sort at conversion. However, the property will always be formerly business property, and if you ever sell that property, the full sale price will be ordinary income to be reported on Form 4797.