Tax practitioners may expect their software to perform all the heavy calculations relating to depreciation, but they are still required to understand some concepts about the subject. The basic principles about depreciation are critical information contained in a registered tax return preparer exam study guide. One of the details is that depreciation begins when an asset is placed in service. The delivery date and payment date are irrelevant. Instead, unknown to many taxpayers, the only date that matters is when depreciable property is first ready for use in a business.
This is a particularly important matter for tax preparer 2012 work. A special rule allowing bonus depreciation expired at the end of 2011. This temporary measure allows deduction of 100 percent of the cost. After January 1, 2012, bonus depreciation returns to the older rate of 50 percent – also a temporary tax law scheduled to expire at the end of 2012.
Bonus depreciation permits an immediate deduction of asset cost. The purpose is similar to Section 179 expense. However, unlike Section 179, bonus depreciation only applies to new assets. A purchase of used equipment does not allow bonus depreciation.
Although 100 percent of cost is deductible for new fixed assets, conducting a tax return preparer job for a business owner still requires obtaining depreciation details. The purchase price of new assets is not simply listed on a tax return like an ordinary expense. Form 4562 is still used to list assets for depreciation.
Gathering information about fixed assets is especially important for purchases made by businesses scrambling to take advantage of extra bonus depreciation at the end of 2011. Tax practitioners must remember from their tax preparer training the importance of placing an asset in service. A business that has simply paid for a new asset without having the property in service by December 31, 2011, cannot claim 100 percent bonus depreciation.
The tax code definition of “in service” that is found in registered tax return preparer study material states “property is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function.” This leaves a little room for interpretation by a tax professional. However, some situations are clearly not allowed to start depreciation. Among these are cases when assets are not yet delivered, still in shipping containers, or not connected to necessary electricity supply.
But one of the facts learned from tax return preparer study about depreciation is that “in service” arrangements may exist when assets are not already generating output for a business. They merely have a “state of readiness.”
Last year, the Tax Court ruled that components of a recording studio purchased in 2002 and 2003 were placed in service during those years because they had been connected and tested. Depreciation was allowed for those years because the equipment was operable despite not actually being used by the business until 2004. Consequently, treat components as single property for tax purposes. Depreciate a functioning component even if the business itself cannot function with that component until connecting to other equipment.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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