tools deduction

[TAX4US]

TP is auto mechanic (Sch C). Buys tools from Snap On truck with open account. Pays whatever mim happens to be each week. Buys bigger tools(boxes and scanners) on a Snap On account and pays mim each week. I read somewhere that because this is handled as a store account TP cannot write these tools off until paid for. Am I totally off base because these tools were put in service the year TP got them, not when he paid them off. Help me grab control of this as I will be picking up this TP as a new client this year.

[Nashville]

Cash Basis Taxpayer

can only deduct what he actually PAID for during year. If he doesn't pay until year, then he can deduct NEXT year. However, he can pay with the proceeds of borrowed money from a bank, can even charge to a credit card and take the deduction in the current year.

If an "accrual basis" taxpayer he can deduct whenever the cost was INCURRED whether he paid for it or not during the current year.

[DaveinTexas]

Similar Discussion

I hope this doesn't get me in trouble for providing a link but I think this has been discussed before somewhere....in the cosmos....http://forum.thetaxbook.com/archive/...p/t-18625.html

[TAX4US]

Snap on still does their own financing. That's where I am having the problem. 5k tool box in service 2015 but will take 3 yrs to pay for. I think small tools as paid for. Just not 100% sure as how to handle.

[sorjgreen]

Question:

If I understand what you are saying here, if a business uses a credit card (VISA) and makes a $5000 purchase, he can write off the whole amount in that year...? And not just the payments he made toward that purchase....

[ATSMAN]

This is how I do it:

1 ) Expense small tools as per the de minimus rules.
2) Depreciate more expensive tools and equipment that is expected to last more than a year.
3) When appropriate sec 179 equipment that will last more than a year.

[TAX4US]

In looking at some of the information if charged to a merchant revolving account(in house financing) then what I am seeing is that only amounts paid for can be taken. However 5k tool box placed in service and paid for over 3 years creates a problem if using this view. I am leaning that the placed in service date would take priority as opposed to when actually paid for. What do you think?

[Roland Slugg]

The "year in which paid" rule for deducting payments by a cash basis taxpayer applies to otherwise deductible "expenses," not to depreciable, amortizable or other long-lived assets. For both cash basis and accrual basis taxpayers, depreciation begins on a depreciable asset when it is "placed in service," whether it is fully paid for or not, as long as there is a bona fide obligation to pay for any unpaid portion of the asset's cost. See Regs §1.167(a)-10(b).

It is common, as well as quite correct, for the books of a cash basis taxpayer to have recorded on them liabilities representing the unpaid cost of depreciable or amortizable assets such as equipment, buildings, goodwill, etc, as well as nondepreciable assets such as land.

The rule for deducting legitimate expenses is that they must be paid. However, if funds are borrowed from a third-party lender such as a bank or credit card issuer, then any payments paid with such borrowed funds are deductible (if they otherwise qualify), regardless of when the lender gets repaid. The principal repaid on the borrowed funds is not deductible, of course, but the interest is ... when paid.