Jump to content
ATX Community
Terry D

Depreciation Question

Recommended Posts

Client purchased a storage container for his business in June of 2017. The only thing I received from him was a receipt showing 500.00 paid as rent for the use of this container. He has now purchased the container and told me the original deal was rent with the option to buy. Because I expensed the rental out last year ( I was not told about this deal) for 500.00. Do I put this on the books for total purchase price of $3200.00 or $2700.00? $3200.00 (original agreed upon purchase price) - $500.00 rent paid = $2700.00 balance due. It appears my client had every intent of purchasing the container. I have looked at all of the lease w/options scenarios. This is a portable container (RR Car) and i don't feel it fits any of those scenarios. Normal rent was $75.00 per month. Client said the $500.00 rent paid was like a down payment. Receipt noted the rent received covered a period of 6 months. Now to muddy the waters a bit more, my client bartered the remaining balance. He repaired the container owner's vehicle(s) in exchange for the container. 

1. I am almost positive that we cannot depreciate the full amount due to the rent expense for 2017.

2. Do I amend the 2017 schedule C, remove the rental expense, add the container to the assets and begin depreciation for the full price?

30 The only cash used toward the purchase of the container was the 500.00 rent.

Any suggestions on how to handle this  please?

Edited by Terry D
To additional comment

Share this post


Link to post
Share on other sites

Are you picking up the $2,700 as income?  You can not have it both ways, i.e., take a deduction and not include the income used to generate that deduction.  Without the income, you have no basis.  That is where you need to start with this.

After that, if it was truly a rent with option to buy, the option was exercised in 2018 and you would put the $2,700 on the depreciation schedule for 2018.

  • Like 3

Share this post


Link to post
Share on other sites

Thanks rfassett, No I am not picking up the 2700.00 as income. Your response was my first thought. But, the bartering thing made me wonder. My client provided services ( repair of vehicles which is his primary business) in exchange for the balance due on the container. I don't have any information regarding the repair of the vehicles or what parts he purchased to facilitate the repair. 

Share this post


Link to post
Share on other sites

I don't thing you get to choose that avenue.

Topic Number 420 - Bartering Income

Bartering is the exchange of goods or services. A barter exchange is an organization whose members contract with each other (or with the barter exchange) to exchange property or services. The term doesn't include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis. Usually there's no exchange of cash. An example of bartering is a plumber exchanging plumbing services for the dental services of a dentist.

Information Returns for Bartering Transactions

The Internet has provided a medium for new growth in the bartering industry. This growth prompts the following reminder: Barter exchanges are required to file Form 1099-B.pdf, Proceeds From Broker and Barter Exchange Transactions, for all transactions unless an exception applies. Refer to Bartering in Publication 525, Taxable and Nontaxable Income, and the Form 1099-B Instructions, for additional information on this subject. Persons who don't contract with a barter exchange or who don't barter through a barter exchange but who trade services, aren't required to file Form 1099-B. However, they may be required to file Form 1099-MISC.pdf, Miscellaneous Income. Refer to the Form 1099-MISC Instructions to determine if you have to file this form. If you exchange property or services through a barter exchange, you should receive a Form 1099-B. The IRS also will receive the same information.

Reporting Bartering Income

You must include in gross income in the year of receipt the fair market value of goods or services received from bartering. Generally, you report this income on Form 1040, Schedule C.pdf, Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ.pdf, Net Profit from Business (Sole Proprietorship). If you failed to report this income, correct your return by filing a Form 1040X.pdf, Amended U.S. Individual Income Tax Return. Refer to Topic No. 308 and Should I File an Amended Return? for information on filing an amended return.

Share this post


Link to post
Share on other sites

Real world answer.

RFassett is correct in everything said.  But I might suggest a solution which is harmless.

Leave the $500 expensed as rent for the prior year.  Do not enter revenue or set up a fixed asset for $2700.  As far as the current year, do not record anything.

For $3200, this is not worth the scrutiny even if detected by the IRS.  My solution would be different if the asset had a value of $20,000.

Understand this is not a "pure" suggestion, and this post could be met with criticism.

  • Like 1

Share this post


Link to post
Share on other sites

I will make one further observation and then I will shut up. Some states or local municipalities have a gross income tax. The $2700 would need to be reported for that purpose.

  • Like 2

Share this post


Link to post
Share on other sites

I get what you are saying, Edsel.  But I would report the income and set up the asset because I would almost bet that any expenses associated with earning that $2,700 of income are going to be reported - such as parts used, or any labor, or overhead. 

  • Like 2

Share this post


Link to post
Share on other sites

Since it's 2018, they still have time to exchange cash for this, and fix the situation.  Pay for the asset.  Get paid in return for the "barter" work.  All the paperwork is right.  Reporting is straightforward.  All the "how did you decide on the value of the barter work?" questions are made moot.  

  • Like 3

Share this post


Link to post
Share on other sites
16 hours ago, rfassett said:

I will make one further observation and then I will shut up. Some states or local municipalities have a gross income tax. The $2700 would need to be reported for that purpose.

Also, the asset should be reported on personal property tax returns.

  • Like 3

Share this post


Link to post
Share on other sites
21 hours ago, Catherine said:

Since it's 2018, they still have time to exchange cash for this, and fix the situation.  Pay for the asset.  Get paid in return for the "barter" work.  All the paperwork is right.  Reporting is straightforward.  All the "how did you decide on the value of the barter work?" questions are made moot.  

The likelihood of getting both parties to agree to this seems very low. When people barter they feel like they're putting one over on the man.

I'd just journal entry it to sales and fixed assets, then 179 the trailer and move on.

  • Like 1

Share this post


Link to post
Share on other sites

While what @Abby Normal says is very true, give them the list of all the additional information they have to provide to support all the transactions, and they might agree to make it cleaner.  As much as they like "putting one over" they detest inconveniencing themselves more.

  • Like 1

Share this post


Link to post
Share on other sites

The "acid test" (in my mind) as to whether to complicate the transaction by reporting income and recording a fixed asset:

If an auditor discovered this, would he take the time to write it up and recalculate a tax return?

In my experience, only a neophyte auditor would take the time and trouble.  Even if taxpayer does not elect s.179 the difference would not be worth his trouble.

Share this post


Link to post
Share on other sites

You do it right regardless of what the auditor will or will not do in the event of an audit. I agree with Gail. Report the income and depreciate the asset.

  • Like 3

Share this post


Link to post
Share on other sites
2 hours ago, Edsel said:

The "acid test" (in my mind) as to whether to complicate the transaction by reporting income and recording a fixed asset:

If an auditor discovered this, would he take the time to write it up and recalculate a tax return?

In my experience, only a neophyte auditor would take the time and trouble.  Even if taxpayer does not elect s.179 the difference would not be worth his trouble.

After you have been preparing returns for a number years, sometimes the gray area between doing what is right and what is expedient gets kind of expansive.

This can be troublesome, especially for those who like me, who practice by themselves.

Share this post


Link to post
Share on other sites
On ‎7‎/‎10‎/‎2018 at 9:58 AM, Gail in Virginia said:

I get what you are saying, Edsel.  But I would report the income and set up the asset because I would almost bet that any expenses associated with earning that $2,700 of income are going to be reported - such as parts used, or any labor, or overhead. 

Exactly, and Gail is spot on. Setting up the asset with a 179 expense will return the same result as a normal expense. I, like Judy, practice by myself and I have to do it right regardless. 21 years and have not done it any other way. Through the course of time, I have made mistakes due to lack of understanding but have always corrected them. I agree with Pacun too, regardless of what the auditor or anyone else says, do it right.

Thanks to all!

  • Like 5

Share this post


Link to post
Share on other sites
On 7/11/2018 at 11:05 AM, Catherine said:

While what @Abby Normal says is very true, give them the list of all the additional information they have to provide to support all the transactions, and they might agree to make it cleaner.  As much as they like "putting one over" they detest inconveniencing themselves more.

Documentation is always a good thing, well, maybe not always...

  • Like 1
  • Haha 1

Share this post


Link to post
Share on other sites
On 7/11/2018 at 12:05 PM, Pacun said:

You do it right regardless of what the auditor will or will not do in the event of an audit. I agree with Gail. Report the income and depreciate the asset.

I do not position myself against those who choose to go to the extra lengths to report correctly.  For Gail and Pacun, this is every bit as admirable as it deserves.  I simply open the door to expediency as an alternative when the difference is harmless.

I can't tell you how many times I've been different by two cents when balancing a spreadsheet, and forced the difference into a nonessential line item to save time.  The key word is "nonessential" since some line items cannot be compromised.  Especially when I'm billing the customer for my time.

  • Like 2

Share this post


Link to post
Share on other sites
11 hours ago, Edsel said:

forced the difference into a nonessential line item

A CPA I worked with years ago disregarded any discrepancy (for his corporate clients) under $10K as being not worth his time (and the client's money) for him to track down.  Journal entry, it goes poof! and on we go with life.

  • Like 1

Share this post


Link to post
Share on other sites

sometimes we are our own worst enemy - barter - yes it sometimes is -0- but not always and laws says to report it - so I feel better to be known for reporting all and deducting all

2 cents is negligible- 10K is not! Guess it all depends...

  • Like 1

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

×