Garage Depreciation

[Acownt4it]

A "friend" just called and said his 2008 has been examined and the IRS determined that the garage he built (20x60) to house his business tools (and only his tools) cannot be depreciated as employee business expenses. He said he called the IRS when preparing his taxes and the agent told him he could. Of course he did not write down the agent's id# or name or date and time that he called. The current agent he is talking to said this is a grey area and is not allowing the deprection.
Anyone have any advice or can you point me to the tax code that may help him in this fight?
As always, thank you for your time and wisdom. I couldn't be a successful sole practitioner without the help from everyone on this board.

[taxea]

A "friend" just called and said his 2008 has been examined and the IRS determined that the garage he built (20x60) to house his business tools (and only his tools) cannot be depreciated as employee business expenses. He said he called the IRS when preparing his taxes and the agent told him he could. Of course he did not write down the agent's id# or name or date and time that he called. The current agent he is talking to said this is a grey area and is not allowing the deprection.
Anyone have any advice or can you point me to the tax code that may help him in this fight?
As always, thank you for your time and wisdom. I couldn't be a successful sole practitioner without the help from everyone on this board.

Did he depreciate the entire garage or just the sq ft that houses his tools? If the entire garage then I agree with the IRS. If the sq ft then I would ask the employer for a letter stating that the storage and tools are for the convenience of the company your client works for. If the employer won't do this then, again, I agree with the IRS.

What does the client do that his 2106 tools require a 20 X 40 storage area? What are the tools? And if the tools are that plentiful and large why isn't he leasing them to the companu he works for?

[Black Bart]

Garage for tools

Interesting case, Noel. Looks like you should be able to deduct it, I mean after all, it's for business use (regardless of size -- maybe this taxpayer's just not as space-organized as some).

Thing is, checking references for "tools" and "storage," I can't find anything specifically addressing this -- did you have the same problem? TTB 5-13 on "Storage" relates to product inventory only. TTB 8-9 on "Tools" deals with the cost of the tools only.

A third one, TTB 10-5 offers a glimmer of hope. While mainly talking about hauling tools, it does say "...any additional costs, such as trailer rental to haul the tools, are deductible." I know that's a stretch away from garage depreciation, but it nails down the deductibility of tool storage to a certain extent -- storage is storage even if it's moving.

What did you find?

[Kram BergGold]

Garage

The only problem I can see with depreciating the garage is home office restrictions for employees. Check out page 5-15 in TTB. If he can argue that the garage is for the convenience of the employer then I say he can deopreciate the garage.

[oceanlovin'ea]

I would think that maybe it might depend on the type of business he is in. If he is employed by a contractor who pays him as an employee but he has to have his own tools, then he would have to have a place to store those tools. They might be large tools and if he wants peace in his house, he can't store them in the kitchen or laundry room.

The other point I thought of was if this is a grey area and "he" isn't allowing it can you appeal it or ask to speak to his supervisor or talk to taxpayer advocate.

It does seem like there should be some recourse to "one person's opinion".

Linda, EA

[MAMalody]

On the surface, it would appear to be deductible. I can't tell if you are getting involved to the point of representation, however, since the auditor made that statement, he essentially has given up the case for appeals. I don't think most clients can effectively argue code or regs unless there is an on-point court case that he can use. I would advise him to simply not agree to the audit and let it go to appeals. With the basic information above and some other info, appeals with probably reverse this auditors decision. When I was an auditor and a case was going to go to appeals my group manager would try to play let's-make-a-deal before it got to appeals. At that time on tenuous issues, appeals job was to keep it out of court.

I had a client one time who had a partnership what was being audited, another pro did the 1065 while I did the individual return, and he insulted the auditor on a depr classification issue that could go either way. Of course, then the auditor firmed up his position that it was handled wrong, especially after this guy called the auditors manager and complained about him. I did know the auditor, but it took a considerable amount of persuasion to get the auditor to relent.

[Burke]

Perhaps the red flag came up because it was described as a "garage." This is usually a term for a car/vehicle housing. Is anything like that in this building? If it is for tools only, I think you can make an argument. But 60 feet long is pretty big for tools.

[taxea]

Perhaps the red flag came up because it was described as a "garage." This is usually a term for a car/vehicle housing. Is anything like that in this building? If it is for tools only, I think you can make an argument. But 60 feet long is pretty big for tools.

ergo all of my questions.

[Gary2]

Is the garage attached? If it's attached, then it would be difficult to meet the "principal place of business test", and I assume the "meet with clients" test, and all the others, are non-starters.

If it's detached, then there may be hope.

[Acownt4it]

garage/storage

It is only for his tools. He has been a mechanic for OTR trucks (semi tractor/trailers) his entire career so he has accumulated a lot of large and expense tools.
Like many mechanics, they are employees but have to supply their own tools.
The garage is detached. Yes it is large, but would this be any different if he had to pay a storage unit? Would the IRS care how big the storage unit is?
He has taken pictures of the garage to prove there are no cars or any personal belongings in this garage. I think he could make the case that it is for the convenience of the employer since there isn't enough room in a repair bays for every employee to store all of their tools. Also it would take the liability off the employer if any tools were stolen.
I have not been asked to represent him yet. I will suggest he file the appeal, call the TPAO.
Thank you for the responses.

[Burke]

The pictures are a good idea. Worth a thousand words. I had a client take pictures of his van, inside and out, to take to an audit, where he had 179'd the entire expense for his business -- company name and logo's on van, equipment inside, etc. Not a peep from the auditor.

[taxea]

It is only for his tools. He has been a mechanic for OTR trucks (semi tractor/trailers) his entire career so he has accumulated a lot of large and expense tools.
Like many mechanics, they are employees but have to supply their own tools.
The garage is detached. Yes it is large, but would this be any different if he had to pay a storage unit? Would the IRS care how big the storage unit is?
He has taken pictures of the garage to prove there are no cars or any personal belongings in this garage. I think he could make the case that it is for the convenience of the employer since there isn't enough room in a repair bays for every employee to store all of their tools. Also it would take the liability off the employer if any tools were stolen.
I have not been asked to represent him yet. I will suggest he file the appeal, call the TPAO.
Thank you for the responses.

The area of the garage that is storing tools can be taken as storage however in order to take any deduction I would think that he would need a letter from the employer stating that this storage is for the convenience of the employer and not his own justification. I fail to see how he would need 20x40 space to store mechanic's tools that are only used for his employer's convenience. It appears more likely to me that he may be "moonlighting" and has built the garage to house what he is working on for "his customers" as well as using and storing these tools for the convenience of his employer.

[taxxcpa]

Tool storage

Even if there are nothing but tools in the garage, it could be argued that the garage is much larger than the space required to store the tools. If tools occupy 10 cubic feet of a 200 cubic foot garage, then, even if the rest of the space is unused, it might be something over and above an ordinary and necessary expense.

I see no reason why it should not be at least partially allowable if his job requires him to furnish his own tools.