Depreciable Doctrine

[Snaggletooth]

One of the tedious events in a tax appointment is explaining why a client must recapture depreciation when he never got the benefit of deducting it. The infamous "depreciable" language which implies that the property could have been depreciated.

Paul buys a new tractor in 2009. Which of the following categorizes this property as being "depreciable" for 2010? Assume that he has NOT taken a depreciation deduction for any of the foregoing:

a) Paul farms his land but does not file a return.
b) Paul farms his land but has a farm loss reducing his tax liability to zero.
c) Paul has a farm loss but cannot claim it in 2010 because he is not at risk.
d) Paul rents out his farm and uses the tractor only to mow/bushhog his large yard.

My opinion, for what it's worth, is a) and b) causes the tractor to be "depreciable." d) is not depreciable, and I don't know about c). Since the loss in c) can be rolled into a future gain, I would think he should have claimed the deduction, but I don't know whether that necessarily means the tractor is depreciable.

[erchess]

My Opinion

a - Reading between the lines I am assuming that he should have filed - depreciable.

b - depreciable because of the increased loss and consequent eventual tax savings.

c - I don't see a lot of passive losses but my understanding is that even here his loss carries forward so depreciation would increase that loss and therefore same as b.

d - tractor is a personal asset and therefore not depreciable.

[JG EA]

Something I need to remind myself: In a situation where no depreciation is taken and now needs to be 1. Do a 3115, 2, Or if that is not necessary due to the client's unique situation do the slowest possible depreciation that could have been taken in the past.

[Snaggletooth]

"Slow" Depreciation

Good Point. Instead of a 7yr life with DDB under class life 01.1, the tractor could have been placed on 10yrs with SL, and possibly even less if bought late in the year.

[OtisMozzetti]

allowed or allowable

One of the tedious events in a tax appointment is explaining why a client must recapture depreciation when he never got the benefit of deducting it. The infamous "depreciable" language which implies that the property could have been depreciated.
...

To the extent that some type of depreciation wasn't "allowed or allowable", say under hobby loss rules, then there is no need to recapture. If some type of depreciation was allowable, but resulted in no immediate tax benefit or resulted in future tax benefit which may never materialize; then that is "too bad" (one of those unfortunate reasons that it pays to have a good tax advisor like all of us).

EA in California

[Gretel]

To the extent that some type of depreciation wasn't "allowed or allowable", say under hobby loss rules, then there is no need to recapture. If some type of depreciation was allowable, but resulted in no immediate tax benefit or even resulted in no potential future tax benefit; then that is "too bad" (one of those unfortunate reasons that it pays to have a good tax advisor like all of us).

EA in California

I have to disagree on the last part (no potential future benefit). If there is no benefit whatsoever than there is no allowable depreciation. Unused OIH depreciation because of income limitation is one scenario.

[OtisMozzetti]

I acknowledge your point

I have to disagree on the last part (no potential future benefit). If there is no benefit whatsoever than there is no allowable depreciation....

I revised the wording about future tax benefit which may never materialize. I acknowledge your point that, if the depreciation never becomes allowable due to future events, such as OIH limitation ceasing to bite, then there is nothing to recapture.