Scott and Kourtney Smith are married and have been clients of Footem and Filem,
ID: 2565730 • Letter: S
Question
Scott and Kourtney Smith are married and have been clients of Footem and Filem, LLP (F&F) for the past few years. Kourtney is an elementary school teacher. Scott owns a landscaping business, Smith Landscaping, which he operates as a sole proprietorship. Scott conducts all of his business affairs from an office he maintains in his home.
In 2005, Scott purchased an antique desk at an auction for $1,000. The desk was built in 1908 and crafted from rich mahogany. It once sat in the personal office of Ron Burgundy, a famous newscaster who often used the desk to read his extensive collection of leatherbound books. Scott gave the desk to his father as a birthday present in 2005.
In April of this year, Scott’s father passed away, leaving the antique desk to Scott. At the time of his father’s death, Scott learned that the desk’s fair market value had increased to $2,000 despite it having some minor damage that had accumulated over the years. Scott paid another $1,500 to have the desk professionally restored to its original working condition. According to a professional appraiser, the restoration raised the desk’s fair market value to $8,000. In honor of his father, who had originally given Scott the money to start his landscaping business, Scott put the antique desk in his home office and began using it exclusively for business purposes in May.
In June of this year, Scott purchased a new leather sofa for $1,000 and a new office chair for $800. Scott put the new sofa and chair in his home office and now uses them exclusively for client meetings. Scott would like to depreciate the desk, sofa, and chair for tax purposes, as he does for all of his business assets.
What is the maximum amount of depreciation Scott can claim for the current year for the desk, sofa, and chair
Explanation / Answer
In order for a taxpayer to be allowed a depreciation deduction for a property, the property must meet all the following requirements:
The taxpayer must own the property. Taxpayers may also depreciate any capital improvements for property the taxpayer leases.
A taxpayer must use the property in business or in an income-producing activity. If a taxpayer uses a property for business and for personal purposes, the taxpayer can only deduct depreciation based only on the business use of that property.
The property must have a determinable useful life of more than one year.
Even if a taxpayer meets the preceding requirements for a property, a taxpayer cannot depreciate the following property:
Property placed in service and disposed of in same year.
Equipment used to build capital improvements. A taxpayer must add otherwise allowable depreciation on the equipment during the period of construction to the basis of the improvements.
Certain term interests.
Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property ceases to be depreciable when the taxpayer has fully recovered the property’s cost or other basis or when the taxpayer retires it from service, whichever happens first.
IRS rules say, when you convert personal use property to business use, the value assigned to the property for depreciation purposes is:
The LESSER of...
...on the date of conversion.
Present case Scott bought has the following Assets
Depreciable assets, except for buildings, fall within a three-year, five-year, seven-year, 10-year, 15-year, or 20-year recovery period under the general depreciation system (GDS).
Hence Scott can claim Depreciation on Desk, Sofa and Office Chari @ 50% of eligible Depreciation for the year.
Eligible Depreciation for the Year - Total value of the Assets - $ 4,300. Per Year Depreciation $ 4,300/7 = $ 614. 50% on $ 614 = $ 307.
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