From: Sarah Smith
Date: July 13, 2014
Re: Depreciation on Rental Equipment ________________________________________________________________________Harry Pickart rents aircraft parts to be used in film production. He purchased the majority of the parts through auctions. The aircraft parts are returned to Harry after the rental period is up. Harry tries to fix the pieces after they are returned since most of them are damaged when they are returned. These repairs are adding to the useful life and allowing them to be rented out again. Harry believes the pieces have a useful life of less than four years and should be classified as three-year property. Questions Presented: Can the aircraft parts that Harry rents out be depreciated over three years and be considered as a three-year property? I would not advise that Harry tries to classify these parts as a three-year property. The actual expected life is not accounted for, but instead this type of equipment is classified already by using the expected life. This equipment falls under the category of a five-year property.
The aircraft parts are considered to be a capital asset and the owner can depreciate this equipment that is being leased or rented out to the customers. In order for the aircraft parts to be considered a capital asset, they must be useful to the business for more than one year, which is this case they are. According to the report, "Report to The Congress on Depreciation Recovery Periods and Methods," which was written by the IRS, anything with less than a four year useful life is considered three-year property. Someone cannot just determine this. There are separate classes for each type of property that must be used. In this case they range from three years to twenty years. Most equipment is categorized as having a useful life of five years. Harry makes repairs on this equipment to try to add to the useful life, but the class stating that falls in the five-year category will not change. The actual useful life does not matter. According to the IRS publication, 946, a three-year property may be a tractor unit for road use, a race horse with stipulations, or a qualified rent-to-own property. The aircraft parts do not fall under any of those categories, so Mr. Pickart would be incorrect in making the decision to do it anyway. In conclusion, Mr. Pickart should definitely follow the classifications set by the IRS. It pays to do things the right way the first time. The MACRS table should help him to understand what type of property is…