Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.
Q: My son is a mechanic and last year he bought about $4,000 worth of tools, which he is paying for on time. The tools will not be paid for all in the first year. Can he deduct the full $4,000 cost for these tools or must he depreciate them, and if so, can he do so if he otherwise does not itemize? He doesn't have a house. Would it be worth it to do that?
A: IRS rules state that the cost of business property having a useful life of more than one year cannot be deducted as an expense and must be depreciated over the expected life of the item. However, your son may be able to make a special "first-year" election to expense the cost of property used in a trade or business, up to $17,500, in one year. The amount of the expense cannot exceed the net income (incomes less all other business expenses) from that business. The election is made on Part I of Form 4562. Assuming your son is not self-employed, the expense from Form 4562 must be reported on Schedule A as a miscellaneous itemized deduction, and his earnings from the business for which the tools were purchased must be at least $4,000 in order to claim the full amount.
Keep in mind that miscellaneous itemized deductions are only deductible to the extent they exceed 2 percent of adjusted gross income. For example: if his AGI is $20,000 then 2 percent, or $400, must be subtracted from the total itemized miscellaneous deductions. The remaining amount is added to his other itemized deductions such as state income tax to reduce taxable income. If self-employed, he would report his income and expenses on Schedule C, and the 2 percent of AGI would not apply. And, even if all payments were not made in 1994, he may still claim the expense. It would be worthwhile to itemize if deductions exceed the standard deduction.
The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.
To submit a question, call Sundial, The Sun's telephone information service, at (410) 783-1800. In Anne Arundel County call 268-7736, in Harford 836-5028, and in Carroll 848-0338. Using a touch-tone phone, enter 6225 after the greeting. Push 1 to submit a tax question; state the question in full. Push 2 to hear a tax tip. Selected questions will be answered in the Business section. No questions will be answered by phone. Please leave your name and phone number.