Memorandum to the File
Date: September 29 2016
From:
Re: James Smith Car Depreciation and Expenses Reduction
Facts:
The facts are; that James Smith partners in an accounting firm and have always engaged in auto-racing as his hobby. Since his children have all grown up, he is now auto-racing on a full-time basis. He bought a racing car worth $50,000.00, and he has already raced it severally. In a recent competition, he was ranked at number four making him gain $5,000.0. The race will get him to incur various expenses such as car maintenance and transportation costs.
Issues:
Is $50,000.0 racing car depreciable and by how much?
Is the 5,000.0 won subject to taxation?
Applicable law:
IRC §183 explains that activities conducted by a person or an organization that is non-profit are not subjected to any form of deduction except under certain circumstances under this section. These deductions are allowable, and the deducted amount should not be more than the total income obtained from those activities.
Delegate your assignment to our experts and they will do the rest.
IRC §167(a) states that a depreciation deduction shall be allowed as an agreeable allowance for purposes of wear and tear, (with the inclusion of obsolescence allowance) and exhaustion. This compensation is provided for property used for trade or property held to provide income. Part IV of this subtitle allows for depreciation about the taxpayer’s property ownership.
IRC §280F(a)(1)(A) limits the amortization of luxurious automobiles where such resources are meant for personal gains. The amount of depreciation should not be more than; $2, 560.0, $4,100.00, $ $2,450.0 for the first, second and, third taxable years during the period of recovery. A further $1,475.00 for the years after the third year of the return moment. In general, any amount exceeding these figure should be treated as expenses.
Reg. §1.183-2(a) states that ‘the term activity not engaged in for profit refers to any activity other than one with which deductions are allowable under section 162.’ Deductions are not allowed to be made on expenses incurred with such non-profitable engagements. In section 162, activities that are held as a sport, done as a hobby, or for recreational purposes shall therefore not be subjected to deductions.
P. Dwyer, 61 TCM 2187 (1991) – in this case, the defendant was not found engaging in any profitable activity that would deny him an allowable depreciation
L.E. Likes, 61 TCM 3012 – In this case, the court said that an investment advisor who also took part in auto racing did not participate in profitable activities. The advisor was not involved in book-keeping practices that would account for profits.
L.A. Bolt, 50 TC 1007 – in this case, the court was able to prove that the race car for the defendant (an electrical engineer), was involved in a profitable activity.
Analysis:
Is $50,000.0 racing car depreciable and by how much? The amount allowed for depreciation as explained in IRC §280F(a)(1)(A) shall be up to $2560 given that it’s the first year of taxation.
Are the 5,000.0 dollars won subject to taxation? James Smith’s activity is a non-profit making activity and therefore cannot be taxed.
Conclusion:
Given that it is the first year of James Smith racing activity, the amount of depreciation to be deducted will not exceed $2560 during the time of recovery. In this case, the amount deducted does not exceed the gains made.
References
Lier, K. O. (1990). Evolution in Tax Shelter Litigation: The Tax Court Closes the Door on Generic Tax Shelters, But a Window Remains Open with Respect to the Additions to Tax and the Increased Interest under IRC 6621 (c). Loy. L. Rev. , 36 , 275.
Walburn, A. (1993). Depreciation of Intangibles: An Area of the Tax Law in Need of Change. San Diego L. Rev. , 30 , 453.
Melone, M. A. (1995). Income Tax Practice and Certified Public Accountants: The Case for a Status Based Exemption From State Unauthorized Practice of Law Rules. Akron Tax J. , 11 , 47.
Dupic, C. M. (2005). The SUV Tax Loophole: Today's Quintessential Suburban Passenger Vehicle Becomes Small Businesses' Quintessential Tax Break. Lewis & Clark L. Rev. , 9 , 669.
Stuebs, M., Wilkinson, B., & Arnold, A. (2012). An ethical tax dilemma: Support of hobby versus trade or business in the presence of competing incentives and client pressure. Journal of Accounting Education , 30 (3), 380-396.
Kahn, D. A. (1979). Accelerated Depreciation: Tax Expenditure or Proper Allowance for Measuring Net Income?. Michigan Law Review , 78 (1), 1-58.
Condon, T. A. (1970). Section 183: Work Horse or Hobby Loss. Cath. UL Rev. , 20 , 716.
