Depreciation of mechanic's tools

[Bees Knees]

In 1999, the IRS through Announcement 99-82 said personal property used in a residential rental activity (appliances, carpet, furniture, etc.) was 5 year property instead of 7 year property. They said those assets fell within asset class 57.0, Distributive Trades and Services.

When you read the description in IRS Pub 946 for asset class 57.0:

Distributive Trades and Services:
Includes assets used in wholesale and retail trade, and personal and professional services.
Includes section 1245 assets used in marketing petroleum and petroleum products.

…you can only reach the conclusion that whoever wrote Announcement 99-82 must have been high on drugs at the time. There is no way a rental activity falls within asset class 57.0, yet IRS now says it does.

The conclusion has to be, unless IRS specifically defines what a specific industry is and a specific asset used in that industry, you use the 7 year asset class.

[Thetaxrookie23]

What do I take from this discussion

The client I referred to in this post is a air conditioning machanic. The tools he depreciated under 5 years would have been specific to this industry. I'm not sure what to take from this discussion. It makes very little difference on his tax owed if I change from 5 year to 7 year because the amount of depreciation is so small, however the only thing I'm concerned with is wouldn't my client need to file an amended return for 2006 to correct the depreciation for that year since this 2006 is the year that he purchased the tools? Thanks for all your help. I'm very greatfull.

[Gretel]

I am answering part of your question. 2006 return needs to be amended if you want to change depreciation recovery period. You can not change after initial year of purchase.

[veritas]

The client I referred to in this post is a air conditioning machanic. The tools he depreciated under 5 years would have been specific to this industry. I'm not sure what to take from this discussion. It makes very little difference on his tax owed if I change from 5 year to 7 year because the amount of depreciation is so small, however the only thing I'm concerned with is wouldn't my client need to file an amended return for 2006 to correct the depreciation for that year since this 2006 is the year that he purchased the tools? Thanks for all your help. I'm very greatfull.

Why would you amend the return? To change it from the correct life to the wrong life?

Five years is correct. Move on and complete the 2007 return.

[Thetaxrookie23]

Thankyou

Thankyou for your help veritas. The reason I asked again, was that the discussion had drifted into depreciation of office desks. I wasn't sure that this applied to my question. It would be alot of extra hassle to amend the 2006 return. I really appreciate the feadback I've gotten here.

[Lion]

Tools

Since it wasn't MY client, I didn't look it up; but I would've guessed 7 years. IF you find that it's really 7, I'd tell the client and give him a ballpark difference in the tax for 2006 and 2007 and my fee for amendments and let him decide what he wants to do. He's already 179'd half; how much is he depreciating? Maybe, just let sleeping dogs lie.

[Davc]

…you can only reach the conclusion that whoever wrote Announcement 99-82 must have been high on drugs at the time. There is no way a rental activity falls within asset class 57.0, yet IRS now says it does.

It was based on a court case. The judges were on drugs.

[Nashville]

7 years

Taxrookie, I believe 7 years is correct. The tools are industry-specific and I believe as such are 7-year property. The 7 year category is a sort of "catch-all" for equipment not categorized elsewhere, and I think this is exactly what you have.

When we say you "can't go back and change" it means the taxpayer cannot change his depreciable elections. You CAN go back and amend for an election that was in error to begin with.

I would explain to the taxpayer that his 2006 return was wrong, and give the option of the 1040X to the taxpayer. If he doesn't choose to do it, then I would absolve myself for the liability of the error, and continue into 2007 as if 7 years had been elected. But under no circumstance would I "over-depreciate" the equipment.

[Black Bart]

Agree with this;

...He's already 179'd half; how much is he depreciating? Maybe, just let sleeping dogs lie.

it's not worth fooling with. Unless he's got exceptionally expensive tools, there won't be any significant money difference.

I've never yet had IRS kick anything back to me over asset lives, methods, or anything else related to depreciation (even when I stuck it right under their noses by sending them the detailed asset sheet along with the 4562). They just aren't interested in such.

P.S. If I was convinced it was seven, then I'd do like Snag says above and change the life for current and coming years. But while I think seven's right, there have been several people here arguing in favor of five years in the past few months.

[veritas]

I like this subject

we've had it before and I will say unequivocally the tools used by the mechanic fall under class 57.0 Distributive trades and services. Look it up it's five year property.

I prepare returns for many retail businesses and many of those are automotive repair shops. We have been using five years for mechanics and shop equipment since 1987.

[David1980]

I agree, tools for a mechanic would be 5 years. Going to the table B-1 vs. B-2 thing discussed earlier, tools are not included in table B-1. However, the activity falls into 57.0. Anything not specifically covered elsewhere would be depreciated at 57.0 class life meaning 5 years.

The reason the desk doesn't fall into 57.0 is because it's specifically covered on table B-1. The tools are not. Thus the difference.

[Black Bart]

See there, Rookie?

...We have been using five years for mechanics and shop equipment since 1987.

I told you they (IRS) wouldn't do anything about it!

P.S. But you've gotta watch Veritas -- those wild Westerners would deduct a baby buffalo if they thought they could sneak it by.

[taxstudent]

To clear up some confusion:

(1) The Service historically has taken the approach that you identify the contents of the different activity classes based on their descriptions in Rev. Proc. 87-56 and the older revenue procedures that preceded it. Providing repair services was explicitly included in one of the predecessors to class 57.0. If you want more info on this topic, I'd start with the Clajon trilogy of cases.

(2) Generally, if you own the assets and use them in your trade or business and you do not lease the assets to someone else, the assets are classified based on your use of the assets in your trade or business. The A/C mechanic's business is repairing HVAC and he presumably uses the tools in the trade or business of providing personal or professional repair services. Therefore it would be classified under 57.0.

(3) There was a priority rule in Rev. Proc. 62-21 that was reaffirmed in the two Norwest cases in the 1990s for assets included in both asset and activity classes. (Asset classes are classified by type of asset while activity classes are classified by activity.) If an asset is included in both, then it is included in the asset class. So desks are seven year assets under 00.11 unless it is not office furniture. There was also a 2003 revenue ruling on this issue.

(4) Announcement 99-82 was not based on a published court decision. There are several ways that you can justify the Service's position in it, but none of them are straight forward.

[Bees Knees]

(4) Announcement 99-82 was not based on a published court decision. There are several ways that you can justify the Service's position in it, but none of them are straight forward.

What they may not have taught you in tax school is many tax rules have no logical justification for the rule. The longer you are in this business, the more you will be convinced that Congress and IRS regulation writers are often high on drugs.

There simply is no other logical explanation.