Auto Expense on Sch C

[oceanlovin'ea]

New client came in Friday to file 2004 tax return. She brought copy of 2003 which had been prepared at the Housing Authority office. It is full of major boo-boos which will cost them more money.

This couple do house cleaning. The preparer of the 2003 return took 100% of actual expenses instead of business use percentage. Also entered business miles as commuting miles and grossly overstated business miles (maybe a typo) entered 79000 instead of probably 7900.
But that would have been the personal miles anyway. So business use percentage is about 33%, which makes this listed property. Auto expenses goes down about 2/3 so they will owe more money.

This person used date placed in service as 2001 (although auto expenses had never been taken before) and recovery period of 4 years - 200DBHY.

Ok, here is my question: In preparing the 2004 return do I use the correct recovery period or must I go back and amend the 2003 to correct the depreciation records. If the client started using the vehicle in 2001 but never took the deductions until 2003, do I use 2nd year depreciation or 4th year depreciation?

I'm sorry if these questions don't make sense. I helped my daughter with her 6 week old and 2 1/2 year old this weekend while the guys went fishing. I don't know if I even have a brain right now.

Thanks. Linda F

[Gretel]

Auto Expenses

Linda, your questions make sense to me.

First of all, though, I would find out when they actually started to use the car for business. If it is 2001 I would suggest to amend open years (if worthwhile). Client really should amend 2003 but you can only advise him of consequences if he refuses. Maybe SMR is the better method than actual? I am not sure you could use SMR with a return filed late.

In any case, if car was placed in service in 2001, I would use 4th year depreciation and just use 5-year recovery period.

[Bird Legs]

Question

Did the guys catch any fish? Where did they go? How long did they stay?
These are the important questions.

[oceanlovin'ea]

Yes

they did catch fish. We live in central Florida. They have some property about 10 miles south of Groveland. There are 5 lakes that are connected. Fishing was good this weekend.

We girls went up Saturday afternoon and they fried fish for us for supper. Mostly speckled perch and bass. That is the BEST eating. Fresh fish. And the men do all the work.

Linda

[Black Bart]

"C" Car

I don't have the full answer to your question--just a few comments.

Some people will list the "placed in service" date as the date they bought the car and thus placed it in "personal" service, rather than the date they started using the car for business which is the date it was placed in "business" service. So, in light of all the mistakes on last year's return, they may actually have acquired the car in '03--you'll just have to ask. However, what preparers put down on returns do not change the facts and circumstances. If they did begin using it for business in 2001, then depreciation began running in that year whether they claimed it or not and you'd be in your fourth year rather than your second.

In order to use SMR, you have to claim it the first year that it (according to Pub. 17) is "available for use in your business" and I'm not sure if that means when you bought it or when you put it in business--I'm sure others here know. Anyway if 2003 was the year they got the car, then you could go ahead and use the standard mileage rate again (even though they figured the deduction wrong last year). You could switch to regular depreciation if it's a late model car with lots of depreciation to be used (not likely), but if not, then they'd probably be better off taking standard mileage.

Another question is this: if they used the car for business in '01 and did not claim the standard deduction that year, does that preclude you from using it now because IRS may consider such failure to be a forfeiture of the right to use SMR in succeeding years?

As to amending '03, they may or may not want to "let sleeping dogs lie," so I'd leave it up to them. It's a long shot that they'll be audited (even with those glaring errors), but I'd tell them there are serious mistakes on it, that IRS would require them to amend, and (if they ask) that they'll owe lots of money. You might add a note to your engagement letter, if you do one, that they acknowledge you have notified them of the need to amend 2003.