Expense or asset or ??

"ira smilovitz" wrote

I'm leaning more toward an asset, much like you would with any other purchased or self-created display at trade shows and the like.

So what do we tell them?

business selling aftermarket auto parts/services for customizing vehicles. Clientele consists of both customization business and individuals. Taxpayer bought an older car, stripped it down to the frame and is rebuilding/customizing the car with the parts that the company sells. When complete, the car will be driven to car shows, etc., to show off the how the parts will look in a car and the services the company can provide.

Are we creating a depreciable asset (capitalize sum of all the out-of-pocket costs), are the costs treated as auto expenses (repairs and maintenance of vehicle), advertising (all or part of cost [I don't know if there will be any "graphic" advertising on the vehicle]), something else?

Advertising is a current expense.

As for the car itself, it sounds like you're building a prototype, and thus the building costs must be capitalized. Research costs, if any here, can be deducted as a current expense. When the car is scrapped or sold then you can deduct the capitalized expenses.

The cost of the wrap (or paint or decal) is an advertising expense. The other expenses associated with the car are only allowed if they would have been allowed without the advertising on the car. In other words, only if the car is actually used for business purposes.

Ira Smilovitz Leonia, NJ

Part of the deal with wrapping a car with an ad is that the car drives around. I wouldn't be surprised if the contract requires the car to be driven.

But since the driving wouldn't be for the specific purpose of satisfying the contract (unless the person didn't otherwise put enough miles on the car as mandated by the contract) I'd guess the mileage would not be deductible.

___ Stu

I'm leaning towards treating this car as inventory, part of cogs.

You're thinking of the situation where someone wraps a car with an ad for someone else and gets compensated for driving the wrapped car. I was referring to the situation where the business owner wraps his personal car with his own business's advertising and tries to deduct the operating expenses of the car.

In any event, car wrapping is irrelevant to the situation I have to address with my client.

Ira Smilovitz Leonia, NJ

advertising around his car and deduct all of the costs associated with the car as advertising expense.

business selling aftermarket auto parts/services for customizing vehicles. Clientele consists of both customization business and individuals. Taxpayer bought an older car, stripped it down to the frame and is rebuilding/customizing the car with the parts that the company sells. When complete, the car will be driven to car shows, etc., to show off the how the parts will look in a car and the services the company can provide.

Are we creating a depreciable asset (capitalize sum of all the out-of-pocket costs), are the costs treated as auto expenses (repairs and maintenance of vehicle), advertising (all or part of cost [I don't know if there will be any "graphic" advertising on the vehicle]), something else?

intention of using the vehicle for any purpose other than displaying at shows or to potential business customers.

Here's my take.

The regular business use rules apply. Business miles divided by total gives gives the business use percentage. I suggest considering the use of actual costs given the investment in the automobile.

To me, the interesting question, for which I do not have an answer, is whether there is someway around the so called "luxury car" limit which applies to most passenger automobiles.

Oh, and the costs of the rebuild are capitalized and recovered (depreciated) over the applicable life.

On 3/22/2012 7:22 AM, ira smilovitz wrote: ...

My non-accountant first thought is Oscar-Meyer "Weinermobile". Does considering that make for any useful thoughts/comparisons?

runs a business selling aftermarket auto parts/services for customizing vehicles. Clientele consists of both customization business and individuals. Taxpayer bought an older car, stripped it down to the frame and is rebuilding/customizing the car with the parts that the company sells. When complete, the car will be driven to car shows, etc., to show off the how the parts will look in a car and the services the company can provide.

rebuild? Are we creating a depreciable asset (capitalize sum of all the out-of-pocket costs), are the costs treated as auto expenses (repairs and maintenance of vehicle), advertising (all or part of cost [I don't know if there will be any "graphic" advertising on the vehicle]), something else?

thus the building costs must be capitalized. Research costs, if any here, can be deducted as a current expense. When the car is scrapped or sold then you can deduct the capitalized expenses.

...Not only that, but as a demonstration model which is NOT offered for sale to customers, it's certainly NOT inventory. Therefore, it must be an asset.

I agree that the car in question is not inventory. I feel compelled to note, however, that inventory is an asset.

Technically true: Inventory is a special class. However, inventory is NOT consumed by use in the business like other assets are.

Yes, inventory is special, just like every other asset, and it is consumed in its own special way -- by being sold.

Applicable life of what? The whole car (5 years) or each part?

Yes, the applicable life of the car. The taxpayer's basis is what he paid for the car, what he paid for the parts put into (or on) the car, and what he paid others for their labor on the car. The value of his own labor does not increase his basis in the car.