Depreciation, Repairs Auto

[geekgirldany]

Client bought a transmission and new rear end gear for his work truck. Special truck that is used for tree cutting. Transmission $2,000, Rear end gear $1500 client did the work on installation himself. Now are these considered improvements to the truck that add on additional life and value and should be depreciated? I know I can do a 179 on them but I would like to classify them correctly.

thank you

[jainen]

repair expense

Can a transmission have a longer life than the truck it is in? No. Are you extending your truck's depreciable life beyond it's original five or seven years? No. All you doing is keeping the truck running as originally intended. Report the whole thing as repair expense.

[Bees Knees]

TTB, page 9-12, "The cost of improvements is depreciated based on the MACRS class and recovery period of the underlying property. Depreciation of an improvement begins on the date the improvement is placed in service. For example, if an addition is made to commercial real estate that is being depreciated over a 39 year recovery period, the cost of the addition is recovered over 39 years beginning on the date the addition is placed in service.”

If it qualifies for Section 179, I would do that to be safe. IRS auditors like to give you problems when you try to write off expensive repairs as repairs instead of depreciation. I had an auditor argue that a new battery needs to be depreciated. I do agree that it is not an improvement if it does not extend the useful life of the vehicle. But then, that could be arguable too.

[OldJack]

I agree with the other post and would expense the transmission and rear end gear as repairs. I don't believe the repairs extend any life as such and I would not bother to capitalize and use §179 as this I believe is within the classification of repairs.

[ED SMITH]

Having been in the automotive business long before the tax business, I can tell you that work vehicles sustain a tremendous wear and tear and oftentimes are not properly maintained. It is not unusual for a heavy truck to go through several transmissions and rear ends during its service life. Broken axles and U-joints are probably replaced as frequently as spark plugs.

As for the dolt auditor, he must have thought it was one of those lifetime batteries, which were sold in the 80's and discontinued because they only lasted 5 years.

[Bees Knees]

This was a client who was an excavator with heavy earth moving equipment and flat bed trucks. They spend thousands several times a year to keep one of those things running.

The only reason the auditor got away with re-classifying a bunch of repairs as depreciation is because the client didn't listen to my boss and went ahead on his own without representation. The IRS found over $100,000 in unreported income (he did his own books, not us), so there was bigger fish to fry. The IRS can make up all kinds of rules when they catch your client doing that.

[veritas]

I say expense it as repairs. I the auditor says capitalize i say fine, we will expense under 179

[geekgirldany]

Thank you all for responding.

I do believe I will go ahead and do it as repairs. I had a client that added a special bed to his truck. Now this cost around $15,000. He owns a sanitation company and I know that this does add value to the truck because he replaced his old bed... or whatever sanitation companies use on their trucks.

I wasn't sure on the transmission or axles on this case. Since it was a smaller amount. But I want to be safe than sorry. You are correct if anything happens and audit is done it can be 179.

Thank you all for your replies.

[dmj4]

Section 179

I usually run it thorugh depreciation and expense it off. It only takes a minute and that covers both sides of the coin. An auditor can move it around all he wants and it won't change the outcome on the return. I had an auditor tell me one time that he takes the approach that it wasn't running properly until the repairs were made (sometimes not at all) so in his opinion it did extend the useful life. This was only a brief conversation with the auditor.

[rosieea]

I usually run it thorugh depreciation and expense it off. It only takes a minute and that covers both sides of the coin. An auditor can move it around all he wants and it won't change the outcome on the return. I had an auditor tell me one time that he takes the approach that it wasn't running properly until the repairs were made (sometimes not at all) so in his opinion it did extend the useful life. This was only a brief conversation with the auditor.

That works well unless the client is up against the 179 $ limit - as is the case with one of my clients. In this case I'd show it as repair & fight the battle later.

[dmj4]

I agree

I didn't mention the limit because she said she knew she could take section 179, so I assumed that the limit was not a problem.

Thanks, I should have mentioned it in case some people don't realize there is a limit.

[geekgirldany]

no the limit is not a problem. he is well under it in this situation.

[Safire]

Restore or Improve

I believe the rule depends on whether the "repair" restores the asset to normal working condition or if the "repair" improves an already working asset.

I would have no problem taking it as an expense, because no one puts in a new transmission unless they have to. The problem you run into with depreciating everything, is that, then the taxayer has to pay property tax on a repair.

[geekgirldany]

I had not thought of the property tax. That is a excellent point.

Our new tax commissioner here is clamping done on businesses here. People who have never received on of the property tax reports to fill out are all of sudden getting one. If they don't fill it out then they get a bill with a estimated tax on it.

[Safire]

Same here.

I had a taxpayer bring in a bill from the county where he lived. The letter said the bill was generated from depreciation numbers on his tax return because he had not listed his property with them when he was supposed to.