2106 depreciation

[Gretel]

A previous thread turned up the question if an employee is also effected by allowed or allowable depreciation rules if job expenses were never itemized. May it be for not filing Schedule A or making too much money to have expenses exceed the 2% threshold.

Does this rule apply to employees?

[Bees Knees]

Good question. IRC Section 1016 (adjustments to basis) says:

(a) Proper adjustment in respect of the property shall in all cases be made…

(2) …for the exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount…

(A) allowed as deductions in computing taxable income….

This is the code section that courts have used to require basis to be adjusted for depreciation allowed or allowable. In other words, if the depreciation was allowed, then regardless of whether or not the taxpayer actually took a deduction, basis must be reduced.

However, notice the actual code says:

…allowed as deductions in computing taxable income

If depreciation is not allowed in computing taxable income, then it is not allowable and does not reduce cost basis. Thus, if an employee cannot use depreciation on Form 2106 to compute taxable income because of the 2% AGI limitation, or the standard deduction exceeds Schedule A itemized deductions, then depreciation is not allowed as a deduction and no reduction in basis is made.

[Gretel]

Thanks. Great info.