Placed in service versus paid date

[Gretel]

Normally you pay for an asset before you place it in service but what happens if it is not paid for, not even a dime, before you place it in service?

Is the only factor that counts for an asset the placed in service date? Somehow it must be since I never heard of partial depreciation because an asset was paid for in installments.

[erchess]

I tend to agree

but if no one posts a cite why don't you PM Bees or NYEA or another really heavy hitter?

[Lion]

Mortgage

You depreciate the value of your rental real estate from the date placed in service, no matter how many years you pay the mortgage, right?

[S T]

Date

Would it not be the date placed in service, regardless of when the first payment was (say on installment/finance contract)

Example: Purchase a computer on 11/11/11 at Dell and there is shipping time - placed in service that date or receipt of delivery date on 11/15/11)? - no payment due until 12/11/11 (credit card or financing agreement)

I would think we would use the 11/11/11 or 11/15/11 (delivery date) not the payment date.

Sandy

[Gretel]

You depreciate the value of your rental real estate from the date placed in service, no matter how many years you pay the mortgage, right?

Well, this is not such a good comparison since the seller of real estate gets paid in full. The loan is a separate deal. Took me a moment to realize that this is different, though.

[OtisMozzetti]

Normally you pay for an asset before you place it in service but what happens if it is not paid for, not even a dime, before you place it in service?

In all likelihood, you have taken on the obligation to pay even if you haven't yet actually paid.

EA in Calif.

[Uncle Sam]

Placed in Service vs Paid Date

I believe two different concepts are being confused.

One is the depreciable cost of the asset, vs financial arrangements for the acquisition cost.

If a depreciable asset was put into service before being paid for, then a liability exists for the entity that has to pay for it. What does the depreciation of the physical use of the asset have to do with its payment?

At this point, the asset should be recorded as a fixed asset, and a liability account be established for the purchase price.

Then the asset can be depreciated when put into service, and when the payment is made for purchase, it should be applied against the debt.

[taxea]

I say the placed in service date is the date it is available for use by the business. Payments on it are of no consequence nor is the actual invoice date.

[ttbtaxes]

I would disagree that payment date is of no consequence in every case.

Let's take the example of a cash-basis taxpayer who buys an asset using "house credit". There is no loan, there is no credit card payment, there is only an IOU to a vendor.

Granted, this may be an unusual, but I don't see how that cash-basis taxpayer can depreciate that asset until the year it is paid.

[Uncle Sam]

Placed in service vs Paid

Even an IOU to a vendor MEANS SOME FORM OF PAYMENT.will be due sometime.
But that has nothing to do with the use of the asset.

[Lion]

Financed

The mortgage on real property or the financing (loan, credit card) on a business asset are definitely similar. And, not related to the date depreciation starts. Depreciation starts on the date placed in service. Not the date completely paid for. If you bought your personal computer in 2009 but converted it to business use today, you don't start depreciating it way back in 2009. You start today. It doesn't matter how you paid/will pay. It doesn't matter when you bought it or when it was delivered but sat in your garage unused. Placed in service is the date to use for depreciation.

[ttbtaxes]

Even an IOU to a vendor MEANS SOME FORM OF PAYMENT.will be due sometime.
But that has nothing to do with the use of the asset.

I stand corrected.

Reg. 1.461-1(A)(1) will allow for the deduction for depreciation even if not paid.

I guess we learn something new every day.

[Bees Knees]

I stand corrected.

Reg. 1.461-1(A)(1) will allow for the deduction for depreciation even if not paid.

I guess we learn something new every day.

Yes and no.

§ 1.461-1 General rule for taxable year of deduction.
(a) General rule —(1) Taxpayer using cash receipts and disbursements method. Under the cash receipts and disbursements method of accounting, amounts representing allowable deductions shall, as a general rule, be taken into account for the taxable year in which paid. Further, a taxpayer using this method may also be entitled to certain deductions in the computation of taxable income which do not involve cash disbursements during the taxable year, such as the deductions for depreciation, depletion, and losses under sections 167, 611, and 165, respectively. If an expenditure results in the creation of an asset having a useful life which extends substantially beyond the close of the taxable year, such an expenditure may not be deductible, or may be deductible only in part, for the taxable year in which made. An example is an expenditure for the construction of improvements by the lessee on leased property where the estimated life of the improvements is in excess of the remaining period of the lease. In such a case, in lieu of the allowance for depreciation provided by section 167, the basis shall be amortized ratably over the remaining period of the lease....

Note that the regulation allows depreciation deductions for a cash basis taxpayer assuming an asset has been created. 99.99% of the time, an asset has been created when placed in service because the seller is going to have some type of loan arrangement in place. But what if there is no agreed loan arrangement?

In our local news, someone was arrested for taking too long of a test drive for a new car. He drove from Milwaukee to Madison and back, claiming he told the dealer he needed to go to Madison first to get something before he could purchase his car.

What if he used the car for business while on the test drive. Did he place it in service? Yes because he used it.

Can he claim depreciation under Reg. § 1.461-1? No because he didn't create an asset, as the dealer did not yet finalize the sale. Even with an IOU, there is some kind of sale and loan arrangement in place that creates an asset. Simply using an asset under a trial period does not create an asset.

[Gretel]

Thanks, Bees, and everyone else. Really nice to have more viewpoints and fine distinctions. Although I always knew that the "Placed in service date" is the starting point for depreciation, it never was clear in my mind that for this purpose a "normal" purchase of an asset is always independent of payment.

[taxea]

I would disagree that payment date is of no consequence in every case.

Let's take the example of a cash-basis taxpayer who buys an asset using "house credit". There is no loan, there is no credit card payment, there is only an IOU to a vendor.

Granted, this may be an unusual, but I don't see how that cash-basis taxpayer can depreciate that asset until the year it is paid.

Okay but in this case...doesn't the TP who got the asset on house credit have a basis as soon as he took possession? To me, for all intent and purpose, they have entered into a sales contract. I would depreciate at date of service and if the House Credit became an issue and the item went back to the seller wouldn't we just properly adjust the depreciation?