Putting a Personal Car or Equipment in Your LLC: Value and Books

Can I put a car or equipment I already own into my LLC and write it off?

Moving something you already own into an LLC creates no deduction. Forming the LLC or retitling the item does not turn a personal item into a business cost. The business share of the item's tax value is recovered through depreciation or, for a car, the standard mileage rate. Property used only for personal purposes cannot be depreciated (Publication 946).

For federal income tax, a one-owner (single-member) LLC is "disregarded": it is part of its owner's return unless it elects to be taxed as a corporation (IRS: single-member LLCs). Moving an item in is then a bookkeeping entry, not a sale, and an item left in your own name can still be depreciated for its business use (Publication 946). An LLC with two or more owners is a partnership by default (IRS: LLC filing as a corporation or partnership), and the move is a contribution to that partnership. Spouses who own the LLC only as community property may treat it as either; spouses in other states file as a partnership.

For an item used only personally until now, the value that counts is the lesser of its fair market value on the move date and its adjusted basis, times your business use. An item already depreciated in your business keeps its basis, start date and method. With a second owner, the LLC generally takes your adjusted basis instead.

What makes a case not simple

• A valuable item (a vehicle, machinery, several computers) going into an LLC that has a second owner (covered below), an S election, or years of mixed use already booked. The starting basis and date, any built-in gain or recapture, and the opening entries all depend on the facts. A corporate election is a different transaction, not covered here.
• The item is worth less now than you paid, or you also use it personally.
• The item was already deducted on an earlier Schedule C, or still carries a loan.
• You got it as a gift or inheritance: your starting basis may not be the price paid (Publication 551).

What to gather: purchase date, price and improvement receipts; dated evidence of value on the move date; for a car, the odometer reading that day; use records; prior returns. The last section says what each proves.

What value do I use: what I paid or what it is worth today?

One-owner LLC, item used only personally until now: use the lesser of the item's fair market value on the move date and its adjusted basis on that date, then multiply by the share of use that is for business (Publication 551; Publication 946; Publication 463 says the same for a car). Two or more owners: the LLC takes your adjusted basis instead, as the two-owner section below explains.

Adjusted basis is what you paid plus improvements, less deductions that reduce basis, such as casualty losses. Fair market value is the price a buyer and a seller would agree, neither forced and both knowing the facts.

If the item is worth more than you paid, the lesser is what you paid, and the extra value is never deducted. If it is worth less, the drop happened while the item was personal, and a loss on personal-use property is not deductible (Publication 544).

In a one-owner LLC, an item that was personal then carries three tax numbers:

When does depreciation start on something I already owned?

For an item that was personal until now, on the day you move it into business use. Property changed from personal to business use is treated as placed in service (ready and available for business use) on that date (Publication 946; Publication 463 for a car). It is not the purchase date, and not the LLC's formation date unless business use began then.

• Cars, light trucks and computers are depreciated over 5 years under the regular system (MACRS, the standard depreciation tables). Other equipment uses the period for its asset class; office furniture is 7 years. Check Publication 946 before the first return.
• Cars and light trucks under a weight limit have yearly dollar caps on depreciation (Publication 463); the weight rule is in Buying a vehicle through your business.
• Entering the old receipt as a new purchase would misstate the start date and basis. A one-owner LLC's books start from the move-date value. With two or more owners, the books and the tax basis can differ (below).
• Depreciation on an item placed in service this year, and on any car, goes on Form 4562, attached to your return (Publication 946).
• This page assumes regular depreciation. Publication 946 says property changed from personal to business use may be qualified property for bonus depreciation; Section 179 has its own tests. Read Writing off equipment in the first year before the first return. Either one on a car rules out the standard mileage rate for it.

How do I record it in the books if no money moved?

One-owner LLC. For an item used only personally until now, debit an asset account and credit owner contributions, dated the move date, for the lesser of fair market value or adjusted basis, before applying the business-use share. Depreciation then runs on the business share only. No cash moved, so nothing passes through the bank account, income or expenses.

The usual entry is not a purchase, income or a loan from you; a loan is a separate decision (Owner contribution or loan to your LLC). Two or more owners. For a debt-free item, debit the asset and credit the contributing partner's capital account by the same amount, once on the tax-basis method (the adjusted basis, which Schedule K-1 item L reports) and, if the agreement carries capital at value, once at fair market value. Keep both sets of numbers; debt the LLC takes on needs its own liability entry (Partner capital accounts). Add the item to the fixed-asset list with its move date, value evidence and basis; if there is no list, see Rebuilding a missing depreciation schedule.

With one owner, a loan that stays in your name is your own debt and the asset is still booked at its value; paying it from the business account is in Mixed-use expenses and business percentage.

Should a car I move in use the mileage rate or actual costs?

For a car you own, the standard mileage rate must be chosen in the first year the car is available for business use; in later years you can use either method (Publication 463). For a car not yet used in the business, that first year is the year of the move. The choice is made by the return's due date, including extensions, and cannot be revoked. A later switch to actual expenses is allowed, but depreciation then runs straight line over the car's remaining estimated useful life, within the yearly caps, never MACRS. Each business mile at the rate also lowers the car's basis by the depreciation built into the rate.

A car that already had MACRS, Section 179 or bonus depreciation on an earlier Schedule C cannot use the rate. Publication 463 is written for a car you own and does not say whether a car owned by a partnership can use it. Which method is better is in Standard mileage or actual car expenses; the log is in Mileage log requirements.

What if I still use it partly for personal things?

Depreciate only the business share. A car used for commuting, shopping or family trips gets no depreciation for those miles (Publication 946). Measure a car by miles. For the year of the move, if you have no mileage records from before it, work out business use for the months after the move, then multiply by the business months over 12 (Publication 463).

A car must be used more than 50% for qualified business use to use accelerated depreciation, tested every year of the recovery period on the whole year's business-use percentage (26 U.S.C. 280F(b)(3)). For the year of the move, the months fraction above gives that percentage (Publication 463's example halves the figure for a move at mid-year), so a mid-year move can land at or below the line even when use after the move is high. If the year of the move falls short, the car is depreciated straight line (the same amount each year) over 5 years, with no Section 179 or bonus, and stays straight line even if business use later rises. If it passes at first and falls short later, it switches to straight line and the extra depreciation taken so far is income that year, and the car's basis rises by the same amount. Form 4797, Part IV, figures it, and it is reported as other income on the schedule that took the deduction, such as Schedule C (Publication 463; Instructions for Form 4797).

In an LLC with two or more owners, use of a car that is leased to, or given as pay to, an owner of more than 5% of the LLC's capital or profits, or a related person, is not qualified business use (Publication 946).

Recording the personal part of a bill is in Mixed-use expenses and business percentage.

What if my LLC has two owners and I put the item in?

Contributing property to a partnership usually triggers no gain or loss for you or the partnership. The partnership takes your adjusted basis in the item, not its value, and its holding period includes yours (Publication 541).

A first-year write-off on a contributed item is not a given: Section 179 does not count property whose basis comes from the previous owner's adjusted basis (Publication 946). Publication 541 does not say whether your adjusted basis in an item you only used personally is what you paid or the lower value, or how the lesser-of-value rule works inside a partnership. An item worth less than you paid needs professional review before it goes in.

A one-owner LLC that later adds a second owner becomes a partnership on that date, and the equipment it holds is treated as put into the partnership then (or, if the new owner buys in from you, part of it as sold) (Revenue Ruling 99-5, an IRS ruling on this exact case).

How do I move it back to personal use, or sell it to myself later?

One-owner LLC. The LLC is part of your return, so there is no second party to sell to. Taking the item back for personal use ends depreciation (Publication 946); it is not a sale. In the books, remove the asset and its accumulated depreciation and record the remaining book value as an owner's draw (Recording an owner's draw). Money the LLC pays you for the item is also a draw. For a car, business use that stops being more than 50% during the recovery period triggers a switch to straight line, and the extra depreciation taken so far becomes income that year, with the car's basis raised by the same amount (Form 4797, Part IV).

Selling to someone else. Report the business part of the sale on Form 4797. For an item also used personally, figure the gain or loss on the business part and the personal part separately; a loss on the personal part is not deductible (Publication 544). Gain up to the depreciation allowed or allowable is ordinary income (Publication 544; Publication 463). A loss starts from the lesser of value or basis on the move date, less depreciation since, not from what you originally paid.

Two or more owners. A distribution to the partner who contributed the item generally triggers no gain or loss for the partnership or that partner until a later sale; the partner's basis in the item is the partnership's adjusted basis, capped by the partner's basis in the interest after subtracting any cash received in the same transaction (26 U.S.C. 732(a)). A complete liquidation of the partner's interest uses different basis-allocation rules (section 732(b), (c)), so settle those before recording the withdrawal. A distribution to a different partner within seven years makes the contributor recognize the built-in gain or loss. A sale to a partner is a real sale; a loss is not allowed if that partner owns more than half the partnership, and a gain can be ordinary income (Publication 541).

What proof of value and business use should I keep?

For listed property such as a car (property the IRS requires extra use records for), you cannot take depreciation unless you prove business use with adequate records or sufficient evidence, and you keep them as long as recapture can still occur, which can be any year of the recovery period (Publication 946). Keep cost, value, use and depreciation records for every item until the limitation period ends for the year you dispose of it, even after depreciation ends (IRS: how long to keep records; How long to keep business records).

Example

These examples are illustrative; figures are in US dollars.

A laptop moved into a one-owner LLC

A solo consultant bought a laptop for US$2,000. It is now worth US$800, and she uses it only for business. The basis for depreciation is US$800, the lesser amount, starting on the move date. Under regular depreciation it is spread over 5 years; whether Section 179 or bonus depreciation can speed that up is covered in Writing off equipment in the first year. Nothing is deducted for the move, and the US$1,200 drop in value was a personal loss. The books debit Equipment and credit Owner contributions, US$800 each.

A truck used 70% for work

A contractor bought a truck for US$40,000. It is now worth US$22,000. He moves it in on January 1 and drives it 70% for work all year. Assume the truck is not subject to the passenger-car dollar caps. The books record US$22,000 as the asset against Owner contributions, and only the business share is depreciable: US$15,400 (US$22,000 times 70%), recovered over 5 years. If the truck has never been depreciated and he chooses the standard mileage rate in the first business year, he deducts business miles times the rate instead, and the depreciation built into the rate lowers the basis. Had he moved it in on July 1 at the same 70%, its business use for the year would be 35% (70% times 6/12), below the more-than-50% line, so it would be depreciated straight line with no Section 179 or bonus.

A two-member LLC and a set of tools

A partner contributes debt-free tools bought for US$3,000 and never depreciated. They are worth US$5,000, and the operating agreement credits her capital account US$5,000. The books at value debit Equipment and credit her capital US$5,000; the tax records keep US$3,000. No tax arises on the contribution. The LLC's basis for depreciation, gain or loss is US$3,000. The US$2,000 built-in gain stays with her: if the LLC sells the tools for US$5,000 with no depreciation taken, the US$2,000 gain is allocated to her.

Different for you?

• The LLC has a second owner, an S election, or years of mixed use already booked, and the item is valuable (a vehicle, machinery, a set of computers): the starting basis and date, whether built-in gain or recapture follows, and the opening entries depend on the facts. Gather the purchase papers, value evidence, odometer reading and use records; bookkeeping help can settle them before the next return.
• The LLC elected to be taxed as an S corporation or other corporation: moving an item in is a different tax transaction, with its own basis and built-in loss rules. A Form 8832 election can take effect from 75 days before it is filed to 12 months after, and Form 2553 is due 2 months and 15 days after the tax year begins; either way the LLC's existing equipment is treated as put into the corporation on the election date (26 CFR 301.7701-3(g)). Bring the election notice and the item's papers to corporate tax help.
• The item is worth less than you paid and your LLC has a second owner: the partners are treated differently on the loss, and Publication 541 does not say how the lower-value rule applies to you. Bookkeeping help can confirm the starting basis and capital account entry before the item goes in.
• You already deducted the item on an earlier Schedule C, or the LLC already booked it as a purchase: the earlier basis, start date and method generally carry on, and the books may need correcting. See Rebuilding a missing depreciation schedule.
• You are buying a vehicle, or moving one into a corporation: see Buying a vehicle through your business.
• You want a first-year write-off, or the item is small: see Writing off equipment in the first year and Expense or capitalize small purchases.
• You put cash into the LLC, not an item: see Owner contribution or loan to your LLC.
• You are unsure how your LLC is taxed: see How LLCs are taxed.