by Michael Lodge
Many times clients who are operating their business out of their home take the in-home office deduction, along with office furnishings. However, we may have to ask our clients what type of office furnishing do you have? If there are antiques in your office the Tax Court has given a ruling that the depreciation expense is for wear and tear, antiques go up in value so the Tax Court said no. Here is part of a great article written by Craig W. Smalley, Founder/CEO of CWSEAPA LLP.
I recently stumbled upon the Tax Court case Kilpatrick v. Commissioner, TC Memo 2016-166. Sam Kilpatrick filed the case pro se, probably because he is a licensed CPA out of Georgia. As it turns out, he is a collector as well. He collects antiques and works of art.
His main job is with a CPA firm in Georgia, but he started his own CPA practice on the side, and on his tax return he had a Schedule C that incurred a loss and approximately $40,000 in unreimbursed employee expenses. He was audited, and you would think that he would know better than to file a tax return with a Schedule C loss, then turn around and have $40,000 in Schedule A unreimbursed employee expenses.
His home office was decorated with antique chairs and desks. In addition, he had several oil paintings that he had purchased that hung in his home office. Kilpatrick deducted these items as office expenses, and the total of the purchases was about $10,000.
The IRS issued Kilpatrick a notice of deficiency for the 2009 and 2010 tax years because at the audit, he disagreed with the IRS disallowing some of his Schedule C and Schedule A deductions.
The Tax Court agreed that Kilpatrick passed the “regular and exclusive use” test for the home office, but it denied the deduction for the antique furniture and oil paintings because these expenses did not fall under Code Section 162(a), which allows a deduction for “ordinary and necessary” business expenses. These costs, the Tax Court said, were capital in nature, and capital expenses are not ordinary and necessary. The court also stated that the items were not office expenses because the amount per item was too high.
In addition, the court entertained the idea of the expenses being capitalized, but it quickly disregarded that notion because a depreciation deduction is for “wear and tear.” The fact that these items would increase in value precluded them from being depreciated.