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Assume there is equipment used for a for profit endeavor that will be deducted from earnings.

That equipment is also sold in the same year, for less than or equal to the purchase price.

How does this affect the deduction, and/or depreciating of assets for federal tax purposes?
Citations welcome.

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This is not a trivial issue, and you should seek a professional advice with a EA/CPA licensed in your state. I can only describe my understanding of the law, but it can in no way be regarded as a tax advice or opinion, and you cannot rely on it in any way whatsoever.


As KeithS said, you cannot depreciate an asset bought and sold in the same year. The purchase of the asset, assuming it was indeed needed and used in the endeavor (and is ordinary and necessary for such a business) is an investment in a capital asset which is depreciated, and is not a deductible expense (unless sec. 179 applies).

The sale is a not a section 1231 sale, since you didn't hold the equipment for more than a year. It is a regular sale, reported on form 4797, and as such you can deduct the loss as short term loss.

If sec. 179 does apply, then all your gain (the difference between the adjusted basis after the deduction and the sale price) is short term gain and taxed at ordinary rates. But since you decide to choose the sec. 179 treatment at tax time, when you already know that the asset has been sold, I see no reason why to do it.

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While this is a business expense question and therefore not technically germane to personal finances, a sole proprietorship owner would have to figure these things out to do his 1040...

To the best of my knowledge, you're SOL. You can neither depreciate nor deduct losses for "Section 1231 property" such as durable equipment that was on the books for less than one year. If you had held this piece of property for more than one year, you could have deducted the difference between the depreciated value of the property and the sale price as an ordinary loss (See IRS Pub 544). You could have also depreciated the property for all years from the year in which it went into service except the year in which it was sold (see Pub 946). However, both publications specifically state that this kind of property must be held for at least one year in order for either deduction to be available.

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  • okay, it looks like this answer covered the losses for durable equipment. but would the purchase itself be a deduction on earnings, and then the sell be income? – CQM Dec 18 '13 at 2:30
  • @CQM From the basic accounting perspective, the asset purchase event itself would affect cash flow, not earnings. Cash is decreased, and the asset account is increased. Imagine that one asset (cash) is transformed into another (equipment). The depreciation expense would have been the (gradual) effect on earnings. Depreciation is designed to spread out the cost so you don't take a hit on earnings for the purchase value. Similarly, the sale of the asset doesn't directly affect income either, except where the value realized from the sale differs from the undepreciated balance. – Chris W. Rea Dec 18 '13 at 14:09
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There is no 1231 gain or loss on an asset held for less than 1 year. This would be a 1245 and it would not have depreciation. It is treated as sale price minus cost. There is either an ordinary gain or an ordinary loss.

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