Wasted Depreciation

[Nashville]

Guy buys a delivery truck equipped for cargo in 2015. Not a pickup, for all practical purposes cannot be used as a personal vehicle. Tells me "I've got a great tax depreciation deduction for this year!!"

Well, I dunno. This guy is an employee - this means any deductibility is limited to the 2% category. Client does not own a home, does no charity, etc. essentially meaning not only is the truck limited to the 2%, Sch A also must exceed $12,600 for any of this to do any good.

Client also has confided in me that he is building up a supply of hand tools and other equipment and plans to quit at the end of 2015 and start his own floor contracting business. If this is true, the depreciation on this wonderful truck will do him more benefit in the future than it ever will in 2015.

Can we begin depreciating this truck in 2016, or does the "placed in service" date in 2015 mean this would fit the category "depreciable" in 2015 and thus lost for one year?

[BHoffman]

Guy buys a delivery truck equipped for cargo in 2015. Not a pickup, for all practical purposes cannot be used as a personal vehicle. Tells me "I've got a great tax depreciation deduction for this year!!"

Well, I dunno. This guy is an employee - this means any deductibility is limited to the 2% category. Client does not own a home, does no charity, etc. essentially meaning not only is the truck limited to the 2%, Sch A also must exceed $12,600 for any of this to do any good.

Client also has confided in me that he is building up a supply of hand tools and other equipment and plans to quit at the end of 2015 and start his own floor contracting business. If this is true, the depreciation on this wonderful truck will do him more benefit in the future than it ever will in 2015.

Can we begin depreciating this truck in 2016, or does the "placed in service" date in 2015 mean this would fit the category "depreciable" in 2015 and thus lost for one year?

Does he receive any reimbursement from his current employer for the use of his wonderful delivery truck?

I would start depreciating the truck when/if the client becomes self employed.

[Nashville]

Taxable Stipend

Yes, Ms. Hoffman, he receives a lousy $25 a week and averages driving about 50 miles per day. And the $25 a week is added to his
taxable pay.

[Kram BergGold]

What I would do

I would pretend to take the alternate mileage method in 2014 and contiue to do so until he starts his own business. At that point, I would continue the mileage method or switch to the regular method using old fashined SL depreciation taking salvage value into condieration.

[Roland Slugg]

Too bad he didn't talk with you BEFORE he bought the vehicle. You could have explained the tax rules and perhaps convinced him that it might be better, for tax purposes, to delay the purchase until he actually went into business for himself. If he went ahead and bought the vehicle anyway, you may, at the very least, have been able to get him to make arrangements with his employer for a mileage reimbursement plan instead of the flat $25 per week. At least that would keep the $25/week off his W-2.

Well, maybe he will take the plunge and actually go into business for himself later this year. That would alleviate the problem of "lost depreciation" somewhat. If that doesn't happen, I would probably advise the client to use the SMR for that vehicle for 2015, and perhaps in future years as well. The SMR has a certain amount of depreciation built into it ... roughly half the total, I believe ... so his basis in the vehicle will be reduced only by that amount until he sells it. Then when he does sell this vehicle, he will probably have a bigger loss than he would if he deducted MACRS depreciation.

This raises an interesting question: If an employee has unusable depreciation on an asset he owns and uses at work, does the "tax benefit rule" come into play regarding the depreciation lost via the 2% haircut on Schedule A? I don't know the answer, but I'm inclined to think it may be a possibility.

Finally, your client may be the kind who will tell you that every mile he drives this vehicle is a business mile, and will resist your effort to remove: (a) commute miles and (b) other personal miles. The time to start educating him about this ... is now.