ABC Taxes, Tips & Tools

Under tax law, busi­ness prop­erty only becomes deductible begin­ning in the tax year that it is placed in ser­vice, the first date it is in a con­di­tion or state of readi­ness for its specif­i­cally designed func­tion. 

 At that point all the expenses asso­ci­ated with equip­ment: the set-up, ship­ment, cost of the equip­ment, sales taxes paid, etc. are all added up to deter­mine its basis for depre­ci­a­tion and other purposes. 

 Sec­tion 179 allows for the expens­ing of new equip­ment in the tax year it is first placed in ser­vice.

 Under a new rul­ing [Brown v. Com­mis­sioner, TC Summ Op. 2009-171] the con­cept of the date equip­ment is placed in ser­vice is solidified. 

Brown was an employee who was work­ing on start­ing his own busi­ness.  He oper­ated a part-time busi­ness as a sole pro­pri­etor and he pur­chased equip­ment in 2002, 2003 and 2004.  He tested some of the equip­ment to become famil­iar with it.  None of the equip­ment was fully func­tional until it was inter­con­nected, which hap­pened in 2004.  In 2004 Brown turned the Sole Pro­pri­etor­ship into an LLC and went into busi­ness full-time.  He took sec­tion 179 and depre­ci­a­tion deduc­tions for all the equip­ment placed in ser­vice in 2004. 

 The IRS denied the deduc­tion for the equip­ment pur­chased in 2002 and 2003.  How­ever the Tax Court held for the tax­payer.  Why?  Because the parts of equip­ment pur­chased in 2002 and 2003 were func­tion­ally inter­de­pen­dent with the prop­erty pur­chased in 2004; the tax­payer showed each piece was nec­es­sary for the oper­a­tion as a whole and no one piece of equip­ment could sup­port the oper­a­tion until all were pur­chased, inter­con­nected and ready to operate. 

 As always, small busi­ness ser­vices and tax­a­tion are our busi­ness.  If you need help fig­ur­ing out when some­thing will become deductible, or if some­thing can be expensed under 179, or advice on what kind of depre­ci­a­tion you should take, Please give Art & Busi­ness Con­sult­ing a call.  We would love to engage you as a client.

 The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in.  Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice.  Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.