U.S. tax law is rich in tax elections—maybe too rich, if
tax simplification is a goal. But many clients
who welcome elections don’t realize that an election isn’t a gift.
It’s a choice of this treatment of that the taxpayer may be stuck with
later.
The Section 179 election is an election so beloved by small
businesses that it’s easy to mistake for a gift. Instead
of writing off business equipment over, say, 5 or 7 years, deducting one-fifth
or one-seventh of the cost each year, Section 179 lets the business owner
deduct 100% (subject to certain limits) in the year it’s acquired (put into
use). For 2002, the dollar limitation is $24,000.
In an actual situation, a business owner used the Section
179 election for a $4,100 item he bought for his welding business.
The IRS later audited his return and found he had misstated his income
by, among other things, deducting as expenses equipment he should have treated
as depreciable capital assets.
These equipment items were the kind which could be 100% deductible
under Section 179. So the client argued to be
allowed to extend his previous Section 179 election to these depreciable assets
as well.
No luck. The Section 179 system
requires the taxpayer to choose and specify which assets are being deducted
under section 179, in the first return filed for the year, or in an amended
return filed within 3 years of the return due date.
The client can change that election within that 3-year period—or later
if the IRS consents.
Here, the IRS audit took the client beyond that 3-year deadline,
so he had no right to add the other items to his election.
He therefore needed consent, which the IRS refused.
A recent tax court case upheld the IRS.
The client’s plight was of his own making. His
effort to change his election arose only after the IRS discovered his misreporting
of the other depreciable assets (and some unreported income), and after time
had run out on his right to change. Consent
to change an election is discretionary with the IRS, and refusing to consent
here was no abuse of that discretion.
Sam H. Patton, 116 T.C. No. 17
For further information, contact James J. Holtzman, CPA
at (412) 635-9210 or mailto:legend@legend-financial.com