Edition 30

Question: I’ve had clients ask and, of course, heard at cocktail parties the discussion about claiming a pet’s medical expenses and other costs. But what is the citation that prevents these deductions? Answer: Wouldn’t it be nice if you could get a little tax help from the government by deducting your dog? Aside from the enormous price breeders charge for designer pets, there are vet bills, food (some people even have their pets eat raw or vegan), obedience classes, clothing, exercise, and daycare to name a few! While today’s is a softball question, I thought we could all use a break from the continuation of the never-ending tax season of 2020. It also raises the issue of citations and documentation. Have you tried finding the one that says you cannot deduct pet expenses? What about the one that says you can? Keep reading to learn how.

If you own real estate, you’re no doubt familiar with that wonderful paper loss called depreciation. But you may not be entirely aware that land cannot depreciate. Alas, you must delete part of the price you paid for your real estate land from your original purchase price to generate your tax deduction. A cost segregation study might be the answer. The study, done by an engineer, can accurately allocate the cost between building and land. This price of the allocation can be cost-justified; after all, it can save you tax. But at lower depreciation amounts, the benefits might not outweigh the cost, or, if you’re a tax pro, your client might not believe it does. You’ve still got a tax return to do. Regulation 1.167(a)-5 tells us that we have to do something: In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump sum, as for example, buildings and land, the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time. It doesn't really give us much guidance. But you may have seen online or heard somewhere about the old 80/20 rule. That’s right, the tax law says 80 percent of cost gets allocated to the building with the remaining going to land. Only, hold on a second, I can’t find a citation for that one. Is it possible there is no such rule? Then again, Reilly’s 19th Law of Tax Planning says that Reilly uses sarcasm when discussing tax. For the truth about this rule, continue reading here.

Most businesses require the purchase of equipment or other property to help generate income. How you deduct the costs of these business assets depends on what it is and how long it will be useful (what are called asset classes and the Business Use Percentages (BUP)). In some situations, you can deduct the full cost of the asset the year you buy it, rather than depreciating it over time, but many times you are deducting a portion of what you paid for the property each year you have it. Fixed assets are assets that have a useful life of more than one year and/or are not expected to be converted to cash within a year (those types of assets are current assets). Land, buildings, furniture, and equipment (including vehicles) are the most common types of fixed assets for businesses. Fixed asset listings are records of the costs of business property and what tax deductions or improvements have been made over time. Unfortunately, these lists can get quite messy and confusing over time, especially the longer a business is in operation, and the more frequently you have changed tax professionals. What most business owners (and even their tax advisers) don’t know is that there are often thousands in tax savings contained on these lists, especially when they are messy or confusing. There are four savings opportunities buried in these records and what you do with them can result in less cash to the IRS. Continue reading to learn more.