Preface: If your business generates significant tax liabilities, and if you are purchasing significant amounts of equipment or other capital assets, considering discussing with your tax advisor what an “in-service asset” is for IRS purposes
Taxes and Equipment Purchases (Segment III)
Credit: Jacob M. Dietz, CPA
If the asset was purchased by year end, and fully functional and used by the business by year end, then the asset is likely in service. However, in some cases, the asset can be in service even if not used.
Here is an example found in IRS Publication 946
“Example 1. Donald Steep bought a machine for his business. The machine was delivered last year. However, it was not installed and operational until this year. It is considered placed in service this year. If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year.”
In the Donald Steep example, it is interesting to note that just because the equipment was on the company property did not mean that it was in service for depreciation. This could particularly apply to a manufacturing company, where the equipment purchased may not be something that can be plugged in and operated immediately.
On the other hand, it is interesting to note that the Donald Steep example indicated that it did not actually have to be used for it to be in service, if it was “ready and available for use.”
Guidelines on all the complexities of placing fixed assets in service is beyond the scope of this article. If your business is purchasing new assets, and there is a question as to when it is in service, talk to your accountant about the specific facts and circumstances of your situation.
If your business generates significant tax liabilities, and if you are purchasing significant amounts of equipment or other capital assets, considering discussing with your tax advisor before the year ends. If possible, talk to them early enough that there is time to alter the facts and circumstances to achieve a more favorable outcome if that would be beneficial. When considering and discussing these matters before year end, it can be hard to know exactly what the income will be for the year. Waiting until after the year ends, however, may make it harder for taxpayers to change the facts and circumstances to get the desired results.
For example, assume that Donald Steep had met with his accountant, and the accountant told Donald in October that having his machine in service would benefit him. Perhaps Donald would then have made sure that the machine was “installed and operational” by December.
Alternatively, suppose that Donald Steep already had enough deductions in the current year, and wanted to wait until next year to depreciate the machine. Then he could have made sure that it was not installed and in service.
If a large piece of machinery comes rolling into your business, what thoughts will be running through your mind? Perhaps you will be thinking “I can hardly wait to operate this piece.” Perhaps you will be thinking “This machinery will not be in service until about two weeks from now.” Whatever you are thinking, enjoy the pleasure of being in service to your customers.