The Grayness of the Tax Code

It is tax time again. After two years in a row that were pretty simple for me, I'm faced with more difficulties in 2006. Starting my business adds lots of complexity. I should probably file for an extension and hire a tax professional. I may still do that. But first I wanted to complain about the lack of consistency of information out there concerning taxes.

When determining the "Placed in Service" date for business equipment, you may be tempted to use the guidance found in IRS Publication 946 "How to Depreciate Property". You figure the IRS is the authority on the subject, but I consistently find these publications written as vague as possible. They are filled with tons of examples which you think would clear everything up, and yet somehow it doesn't.

Take for example the following excerpt taken from page 7 of this year's publication 946:

Example. You bought a home and used it as your personal home several years before you converted it to rental property. Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. You can begin to claim depreciation in the year you converted it to rental property because its use changed to an in- come-producing use at that time.
That sounds pretty clear. OK, so I buy a $2000 computer in 2005 for personal use. In 2006, I start a company, and I begin using the computer for business use. What is my Placed in Service date for depreciation deduction purposes? The example above clearly indicates that the date should be the date I bought the computer, despite not using it in my business for a year. What would the basis be? Well, on page 12 of IRS Publication 946 clearly states that it should be the lesser of either the original cost (including adjustments to that basis) or the Fair Market Value (FMV) of the date the use changed. Well, for any computer, the FMV will be the lesser of those two amounts. But this makes no sense! Shouldn't the Date Placed in Service match the date you are using to value the asset? OK, OK, so when did the IRS ever make any sense. What follows is what really makes me throw my hands up.

TurboTax says this:

Placed in Service

Property (an asset) is considered placed in service when it is available and ready to be used for its intended purpose.

If you start using a personal asset in business, the placed in service date is the date when you started using the asset in your business.
So TurboTax is even more vague. The first paragraph more or less agrees with IRS Publication 946, but the second paragraph explicitly contradicts it. While I've never been a good web searcher (even using google), but I couldn't find anything on the web to clarify the issue (mostly a bunch of hits on the specifics of deducting SUV's and/or hybrid/electric vehicles).

What's an honest taxpayer to do? I guess the same as always... pick your interpretation, and be consistent with it. Oh, and hope when you're audited, that the IRS agrees with your interpretation. Sigh.

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