Tax

In our continuous effort to provide value, here are some crucial insights into depreciation, particularly regarding business or rental assets.

When Does Depreciation Start?

Technically, depreciation begins not when you use an asset but when it’s ready and available for its intended purpose. For instance:

• A rental property begins depreciating when it’s available to rent, even if it hasn’t been rented yet.
• A farming tool is set to begin depreciation when you receive it, regardless of when you’ll use it.
• A business vehicle begins to depreciate when bought for business purposes, even if not driven yet.

Best Practices

To prevent any ambiguity, if a property is ready for rent, list it. For business vehicles, it’s ideal to drive them for business soon after purchase. This ensures there’s no question about their intent and use.

Assets That Are Vacant, Idle, or Standing By

Even if your asset is temporarily not in use, it doesn’t mean you stop claiming its depreciation. The continued depreciation applies to machines that are momentarily idle due to a lack of demand or a vacant rental property while you search for tenants.

When Does Depreciation End?

Business and rental properties typically remain depreciable until you remove them from their designated use, often when you sell or dispose of them.

Should you have any questions or require a deeper discussion on depreciation, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 6, 2023

I have great news! You can have in your real estate portfolio both investor and dealer properties. This distinction is significant for tax purposes.

Here’s a snapshot of the potential tax differences:

Suppose you profit $90,000 from a property sale:

• As a dealer, your tax could be up to $46,017.
• As an investor, it might be only $21,420.

That’s a potential savings of $24,597 in taxes for investors!

You look at every property individually to determine its classification and make sure you identify each property in your records as either an investment or dealer property. Not doing so can lead to complications with the IRS, and believe me, you don’t want to rely on the IRS for “mercy.”

How the courts determine your classification:

• The primary factor is your intention when purchasing and holding a property. Your records play a pivotal role in illustrating this intent.
• Properties meant for sale to customers are dealer properties. If you frequently buy and sell properties within a year, they’re likely considered dealer properties.
• Properties purchased to renovate and sell usually fall under dealer properties.
• Subdividing properties also leans them toward dealer classification unless they meet the specific criteria of IRC Section 1237.

On the other hand, if your goal with a property is appreciation or rental income, it’s considered an investment property.

Remember, each property’s classification is determined independently. So, whether it’s you or your corporation, owning both dealer and investor properties is possible.

Need assistance classifying your properties? Please call me directly at 408-778-9651.

• By Leon Clinton
• October 3, 2023

For 2024, you can elect the de minimis safe harbor to expense assets costing $2,500 or less ($5,000 with audited financial statements or similar).

The term “safe harbor” means that the IRS will accept your expensing of the qualified assets if you properly abided by the safe harbor rules.

Here are three benefits of this safe harbor:

1. Safe harbor expensing is superior to Section 179 expensing and depreciation because you don’t have the recapture period that can complicate your taxes.
2. Safe harbor expensing simplifies your tax and business records because you don’t have the assets cluttering your books.
3. The safe harbor does not reduce your overall ceiling on Section 179 expensing.

Here’s how the safe harbor works. Say you are a small business that elects the $2,500 ceiling for safe harbor expensing, and you buy two desks costing $2,100 each. On the invoice, you see the quantity “two” and the total cost of $4,200, plus sales tax of $378 and a $200 delivery and setup charge, for a total of $4,778.

Before this safe harbor, you would have capitalized each desk at $2,389 ($4,778 ÷ 2) and then either Section 179 expensed or depreciated it. You would have kept the desks in your depreciation schedules until you disposed of them.

With the safe harbor, you expense the desks as office supplies—your tax records life is easier.

You and I do a two-step process to benefit from the safe harbor. It works like this:

Step 1—You. For safe harbor protection, you must have in place an accounting policy—at the beginning of the tax year—that requires expensing an amount of your choosing, up to the $2,500 or $5,000 limit. I can help you with this.

Step 2—Me. When I prepare your tax return, I make the election on your tax return for you to use safe harbor expensing. I do this with an election statement on your federal tax return and file that tax return by the due date (including extensions).

If you want to use this safe harbor in 2024, we need to set this up so that it is in place on January 1.

• By Leon Clinton
• September 29, 2023