Tax Guru – Ker$tetter Letter

One common mistake taxpayers often make in regard to claiming Section 179 and depreciation deductions is the proper timing of it.  Many believe that they can simply pay for new equipment in the last month of their tax year (December for calendar year taxpayers) and claim the deductions on that year’s tax returns, even though the items aren’t received or used until the next tax year.  That issue led to this interesting recent email exchange from a reader. 

Reader:

Subject: What constitutes service for Section 179?

Dear Kerry,

Thought this might be something good to blog about, so I am sending you a question we receive mixed responses on…

We have recently agreed to purchase a piece of Large Medical Equipment. The agreement has been signed in December, and partial installation will occur in December with the full installation to complete in January.

We will begin training on the system in December. Can you help me understand the definition of “placed into service?” 

Officially, we will begin web-based training and didactic training in December on how to use the system, and a portion of the system will be installed. The product will not be fully installed until January, but essential parts (training, install) will begin in December.

Since the training process and installation begins (essentially starting the “use”) in December, will the equipment expense qualify for the Section 179 in 2013?

Thanks,

My Reply:

As much as I love to stretch the laws as much as possible in favor of the taxpayer, I wouldn’t feel comfortable deducting the cost of this new equipment on a 2013 tax return.

Placed into service generally means using the equipment itself for the business purposes, which would mean doing the analysis or tests on patients, or whatever the equipment is intended for.

Training on the actual operational equipment might be a closer step to a valid Placed in Service test; but the equipment not being operational and doing the training only on simulators just doesn’t cut it.

You’re just going to have to wait until your 2014 to deduct the cost of this equipment.

Good luck. I hope this helps.

You’re correct that this is a good topic to include in my blog. Thanks for writing.

Kerry Kerstetter

Follow-Up:

Thanks…interesting caveat…this type of equipment can take 1-2 months to install, and additional time to train all staff and doctors to finally “use on a patient.”

“Using” or “placed into service” really seems to be the key terms to understand. The company must train (aka: place into service) on the device prior to someone actually “using it” on a patient, and they will not begin training until it is purchased. So, in a fair world “use”, in my opinion should be the actual beginning of the training process. What a crazy world…

Thanks for writing back!

Sincerely,

My reply:

I wouldn’t feel comfortable trying to defend against IRS the beginning of installation and training as “placed into service.” However, if you and your professional tax preparer do choose to take such a stand, please keep me posted over the next few years as to whether IRS accepts your interpretation.

Good luck.

Kerry