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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
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Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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Hello Steven, Thanks for all the great help so far. I have

Resolved Question:

Hello Steven,

Thanks for all the great help so far. I have 2 more questions that I'm hoping you can help me with.


Most of the business assets (the rental cars) were put into service in Q1 and Q2 so being able to Elect to use the Mid-quarter tables for the appropriate quater would be much better for my situation than having to use the mid year tables. When choosing which depreciation method to use for rental cars purchased and put into service in Q1 and Q2 can I elect to use the Q1 and Q2 tables to depreciate these assets, or am I stuck using the Mid-year tables because greater than 40% of my assets were NOT put into service in Q4. Again, I really hope you know of a way in the regulations where I can use the Quarter tables instead of the mid-year table for this situation.

Second, I'll have several vehicles I've owned forever that I don't have any purchase details for that I'll be transferring to the rental company. They are at or above High retail value condition level per the NADA's classic car value guide's definition, the authority for this industry. My insurance company requires me to maintain the cars at or above the high retail value condition as part of the lower cost policy b/c in their eyes doing so lowers liability risk exposure. Because the cars were only $800 when "newly purchased" 60 or more years ago by the original owner am I required to only use as the basis of depreciation $800 or can I use the current average retail value when the cars were titled in the rental company's name, which say, is more like $20K? I plan to only use the value of an Average condition car because this is less than the real condition of the cars and less than the true value to replace the cars should I need to, so in my mind its a much more easy Basis to defend than using the High retail value per the NADA guide.

Thanks again for all the great help navigating what likely isn't a situation that comes up very often!
Submitted: 4 years ago.
Category: Tax
Expert:  MequonCPA replied 4 years ago.

DearCustomer-

 

You cannot use midquarter unless 40% of the assets were placed in service in the 4th quarter.

 

Your basis for depreciation of the vehicles that you transfer in will be the LESSER of your actual cost plus any improvements/restoration made prior to the contribution OR the current fair market value of the vehicle. I would guess in your case, you basis will be cost plus improvements.



Edited by Steven Meyerson, CPA on 7/1/2010 at 4:27 PM EST
Customer: replied 4 years ago.

OK,

 

Just to double check, are there possibly any exceptions to having to use the Mid-year tables that might apply to my situation?

 

For the second question, to assign a reasonable "basis," my issue is that I have no documentation to support what my cost was when I purchased the vehicles many, many years ago, nor do I have any records to support what the improvement costs were. I had all this but lost all my records in a military move 7+ years ago when I was still on active duty. What I have now are just the antique cars and the NADA guide. And I need a defendable way to come up with a Basis for depreciation that isn't what the cars sold to the original owner was 60+ years ago because the higher the basis the better the outcome, but it has to be a valid and defendable method with some sort of precedent. can you tell me what method has strong precedent that's relevant to my situation?

Customer: replied 4 years ago.

Steve, for my first question, I may have been asking the question the wrong way. My goal is a valid and defendable way to maximize my depreciation in the first year. Since the cars used in the rental company are used I do not qualify for bonus depreciation. Since my start up expenses far offset my income in year 1 I can not use Sect. 179. So What I'm left with is maximizing standard MACRS.

 

I've found 3 or 4 similar statements on line but I can't find anything that I would consider an "authority," like a Rev Proc or a Rev Ruling or a Court Case. But if this is comon practice in the rental car industry, it would definitely be helpful in light of the fact that I'm likely stuck using the mid-year method because of when the majority of my assest are placed into service.

 

"Some types of business will use a different depreciation schedule. For example: a rental car business may shorten the useful life of a car from five years (as estimated by the IRS) to two years because its cars are used much more frequently and get used up much quicker than they would in another type of business."

 

I would like to at least find a valid and pertinent "authority" that allows for the use of the 3 year mid-year table as opposed to the 5 as is suggested in multiple places is appropriate for a rental car company. Is that something you could provide?

Expert:  MequonCPA replied 4 years ago.

DearCustomer-

 

Comment: Make sure that your start up expenses are deductible vs amortizable.

 

There are no exceptions to the rules for midquarter convention.

 

I would find it hard to support a 3 year life in your rental situation. Rental fleets get alot of service, in most cases more than the standard 12K - 15K annual mileage. I don't expect that to be your case. Also, you still have the "is it truly depreciable" argument to support.

 

You will have a few options for supportable basis. 1. Zero, because you have no records. 2. Use the NADA for current value and restate for value on date of purchase (may be on titles) using the consumer price index (link below) Example 1963 XKE purchased in 1985, current blue book value $35K. Basis $17,557 (35,000/214.537 * 107.60. 3. Find old Hemmings (used bookstores, auto meets) to determine value at date of acquisition.

 

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

 

Customer: replied 4 years ago.

Understood on all counts but the last one I just want to double check I understand. I will use Option 2 as long as this is a valid convention.

 

Current value per NADA / current rate * annual rate = Valid Basis when nothing else exists? Correct?

Expert:  MequonCPA replied 4 years ago.

DearCustomer-

 

NADA / current cpi * cpi for year of acquisition = a reasonable determination of basis. It certainly is not the preferred method, but it is a reasonable method. Anything other than the lower of cost or FMV is still subject to challenge by the IRS.

MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2324
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
MequonCPA and 8 other Tax Specialists are ready to help you
Customer: replied 4 years ago.
Understood. Many thanks again!
Expert:  MequonCPA replied 4 years ago.
Glad to be of service.

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