You Can’t Write Off An Item Your Business Isn’t Using

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PlaneGetting tax write-offs for purchases you make through your business is a good deal.  And if you do business as an S corporation, you know lots of tax benefits flow through your business to your personal tax return.   You can write off all sorts of things and save yourself and your business a lot of money.

But you can’t write off an item the business isn’t using.

Consider Shanda Douglas, owner of Bantam, a trucking business.  Bantam held itself out as a “critical timing” delivery service – a customer could count on the punctual pickup and delivery of its goods.

One of Bantam’s employees was Shanda’s husband, Charles.

Charles became concerned that Bantam’s business and reputation could be jeopardized if Bantam couldn’t make critical deliveries because a driver became ill or couldn’t continue driving for some other reason.  A truck would be out there somewhere, the goods to deliver would be in it, but how would the truck get to the destination on time if the driver was unable to perform?

To supposedly deal with this potential problem, Bantam decided it could fly substitute drivers to the location of the truck to relieve the driver and complete the delivery. And so Bantam purchased a Cessna plane in October 2006 for $19,500.

At the same time, Charles began taking flying lessons.

Nine months later, Charles wanted more and bigger. So Bantam sold the original Cessna for $26,000 and, a few months later in 2007, bought an even bigger Cessna for $135,000.

And through it all, Charles’ flying lessons continued.  When tax time rolled around, Mr. and Mrs. Douglas — and their CPA — decided to take a deduction for the company planes.  They knew, because Bantam was an S corporation, the deduction would flow through to the Douglas’ joint income tax return and save them a pretty good sized chunk of change.

Remember, the only thing the plane had been used for since it was purchased was for Charles’ flying lessons. Bantam has no other employees with a pilot’s license. There was no evidence that Bantam had any “stand-by” pilots available to assist in the event a driver became ill on the road.  In short, the Cessna was never used to transport a replacement driver . . . or to do anything for the Bantam company.

So was Bantam’s “business reason” for the plane viable?  The IRS said no way. A business can take a deduction for the cost of business property . . . but only if the property is ready and available for a function that would produce income.  And the business use has to be more than 50% of the property’s total use.

That obviously wasn’t going to work for the Cessna, which wasn’t going anywhere but to flying school.

The Douglases argued that the plane was subject to an “idle asset” exception to the business reason rule. People use this exception to justify an asset that is devoted to the taxpayer’s business, and was all ready for use should the occasion arise, but wasn’t in constant use. (Think: fire extinguisher.)

But this argument didn’t work. The Cessna had only been used for Mr. Douglas’ flying lessons, and he wasn’t yet licensed to fly anyone anywhere.

No other pilots were on the payroll or on a standby list to be called in case a business need arose. Clearly the plane wasn’t ever going to be used to get replacement drivers to stalled trucks. End of deduction.

So this story provides two lessons:

  1. If your business purchases something that looks like a business asset, but is never used by the business, you won’t get any tax benefit.
  2. If that asset doesn’t pass the tax test, there may not be any liability protection around the asset either.

Bottom line:
As Mr. and Mrs. Douglas found out, you cross a line when you take business tax deductions for assets that only have a theoretical business use. It doesn’t matter who (or what) wrote the check to buy the asset. There has to be a real business connection.  Otherwise, pardon the expression, but the tax breaks won’t fly.

Just for fun:
If you’re a Seinfeld fan, you might remember this classic moment when Jerry and Kramer discuss write-offs.  It lasts under 60 seconds, so have a quick laugh.