Capital or Deductible

[Snaggletooth]

This might be a GAAP question more so than a tax question. CPAs - your opinions heavily solicited.

Andrew is a jeweler and is approached by someone liquidating their jewelry. He buys a very nice 1.5 ct diamond stone for only $600. When mounted its retail value could be 8X to 10X his purchase value. He charges inventory for $600.

He decides to spend another $150 to have this stone appraised by an expert.

Question A: Should the $150 be capitalized and inventoried with the $600, or can it be deducted?

Question B: Same facts as above, only this time the appraiser is a nationally-recognized expert, and a certified appraisal from him will enable Andrew to charge more for the stone. Andrew has to pay this guy $400. Is the $400 inventoried or deductible?

[ChEAr$]

This might be a GAAP question more so than a tax question. CPAs - your opinions heavily solicited.

Andrew is a jeweler and is approached by someone liquidating their jewelry. He buys a very nice 1.5 ct diamond stone for only $600. When mounted its retail value could be 8X to 10X his purchase value. He charges inventory for $600.

He decides to spend another $150 to have this stone appraised by an expert.

Question A: Should the $150 be capitalized and inventoried with the $600, or can it be deducted?

Question B: Same facts as above, only this time the appraiser is a nationally-recognized expert, and a certified appraisal from him will enable Andrew to charge more for the stone. Andrew has to pay this guy $400. Is the $400 inventoried or deductible?

My vote is to capitalize in both situations for both accounting and tax purposes.

[Roland Slugg]

The appraisal is a necessary cost of acquiring the stone, or at least a cost deemed necessary by the acquiring jeweler, so the cost of the appraisal ... whether $150 or $400 ... should be added to the diamond's inventory cost/basis. (See Regs §1.471-3(b))

If the appraisal report says the stone is really a CZ, then a write-down may be in order.

[Snaggletooth]

Good Answers

Thanks ChEAr$ and Sluggo. I didn't know this has been addressed in the regs.

[ChEAr$]

Thanks ChEAr$ and Sluggo. I didn't know this has been addressed in the regs.

Neither did I, Ron. (grin)