So, when can I start depreciation?

In a recent Tax Court Summary Opinion, it was held that the placed in service date, not necessarily the purchase date, is what controls the depreciation and expensing deductions.

 

In the opinion, a music business owner bought pieces of equipment over a two-year span, but didn’t use the items in his business until they were connected and integrated, which happened in the third taxable year. In the third tax year, the taxpayer claimed a section 179 deduction and computed his depreciation deductions accordingly.

 

The IRS contended that the equipment was placed in service in the two years in question because the petitioner tested some of the equipment before the third year.  The IRS also argued that the equipment was ready and available for its specifically assigned function at that time.  Therefore, the IRS believed the taxpayer’s ability to take the section 179 deduction was limited. 

 

 

However, the Tax Court agreed with the taxpayer that the equipment was not used until the third year and was therefore placed in service that year. Although the equipment was tested by the taxpayer to become familiar with it, the equipment was not fully functional until it was interconnected in the third year. The Tax Court stated that individual components are treated as single property for tax purposes when they are functionally independent. Regardless of the amount of testing petitioner performed on each individual component, the equipment was not capable of performing its assigned function until interconnected and capable of supporting the operation of the studio. Each piece of equipment was thus essential to the operation of the studio as a whole and was not useful or able to be used to operate a business by itself.

 

Accordingly, the Tax Court held that the equipment purchased in the two-year span was placed in service in the third year and the taxpayer is entitled to the depreciation and section 179 deductions claimed on his tax returns.

 

For more information on this tax topic or other tax issues, please contact Brent McClure at Kiesling Associates LLP.