Depreciation - Temporary Cease in Business

[pmedders]

Client started a business in 2001 and had depreciating assets. If client stops business for a couple of years, but plans on starting business back up; would client continue to depreciate assets during the time that business was not open?

[RLymanC]

Stop Depreciation

You stop depreciation, when back in business depreciation starts again.

There is a check box in my software that does this, makes it real easy to stop and start any item that is listed on the depreciation work sheet.

[OldJack]

First, you don't say what type of entity this business is. As his plans is to "temporarily" stop and start again it becomes a possible problem.

What you must decide is:

1.) Is the business still in existence or alive during the period the assets are not used?
2.) Has the assets been withdrawn from the business and therefore a liquidation or distribution ? and
3.) Do the assets fall under the classification of "idle property". ?

Idle Property
Continue to claim a deduction for depreciation on property
used in your business or for the production of income even
if it is temporarily idle (not in use). For example, if you stop
using a machine because there is a temporary lack of a
market for a product made with that machine, continue to
deduct depreciation on the machine.

[Bees Knees]

You stop depreciation, when back in business depreciation starts again.

There is a check box in my software that does this, makes it real easy to stop and start any item that is listed on the depreciation work sheet.

I disagree. TTB, page 9-20 says you continue to take depreciation. You only stop depreciation when it is clear you are no longer going to use it for business.

[pmedders]

Business is

owned by a sole proprietor. He owns a road side coffee stand. He was running his coffee stand as his sole business. He has since gotten a job as an employee and plans to start running his coffee stand business at special events such as the Nascar races for example on weekends after a year or so. So, asset would be idle but only because owner has decided to not have business for awhile. Would you continue depreciating or pick back up when he starts up his business again?

[Bees Knees]

I stand by my last statement. You continue to depreciate property while it is temporarily idle. You only stop depreciation when it is reasonable to believe that the asset will no longer be used in business.

I had to argue this point with an auditor once who tried to throw out all deductions for a rental unit that was undergoing extensive repairs and did not generate any income for the year. As to the depreciation, not only do the Pubs agree that you continue depreciation, but I found a court case (Yellow Cab Company of Pittsburgh v. Driscoll, KTC 1938-9) where the taxpayer stored 18 taxicabs from July 1, 1931 until abandonment on November 30, 1935. For their preservation at the time of storage, the taxpayer removed all water, gas, batteries and tires. The court concluded depreciation was still allowed until the time they were abandoned.

[OldJack]

I agree with Bees Knees that the depreciation continues claimed or not (allowed or allowable) as the business has not liquidated, the assets are simply idle and even the intent is to continue the business later.

[pmedders]

If no business in

2006 had zero income and client did nothing with his business, he would still file a schedule C in 2006 showing the deprecation expense?

Thanks for helping me to clear this up in my mind!

[Armando Beaujolais]

2006 had zero income and client did nothing with his business, he would still file a schedule C in 2006 showing the deprecation expense?

Thanks for helping me to clear this up in my mind!

That is correct.

I'd also suggest copying this thread so you'll have a record of Bee's citations. Drop it in the client file and you'll have it in case of audit.

[pmedders]

Thanks to all for

your great input. Much appreciated!

[oceanlovin'ea]

New twist

I had a client come back into my office yesterday. I had filed a 1040EZ for him for 2005. In 2004 he had started a floor cleaning business, but had no income only expenses. I think he started it in August of 2004 or something like that. So I filed the Schedule C for 2004 with only expenses.

When he came in the first time he told me that he didn't get any jobs and so he had to go find a job. He had not tried a lot to get jobs, but did keep license active and did make a few contacts. So I filed EZ with just his wages.

He called IRS and talked to someone about his "business". He was told that he needed to file his business even if he made no income from it. He had expenses of license and depreciation. So I amended the return and put the schedule C on the return. In my explanation on page 2. I documented that IRS had told him to put Sch C in return.

Conclusion is that I guess even if no income, until the owner says he is closing the business, they can claim their expenses without income. IRS said so!!

Thought it was interesting since I had just been reading these posts.

Linda F

Linda F