By Ken Berry.
Generally, you can claim depreciation-related tax breaks for qualified business property that is “placed in service” during the year. But when does that actually occur? In a new case involving a yacht chartering operation, Lentine, TC Docket No. 12443-21, 3/25/25, the Tax Court acknowledged that these can be tricky tax waters.
Background: In essence, an employer can recoup the cost of qualified business property over time, taking regular depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS). Alternatively, the employer can elect to currently deduct or “expense” much, if not all, of the cost of the property through a generous Section 179 election. Currently, the maximum deduction is $1 million (indexed to $1.25 million for 2025).
Furthermore, an employer may claim “bonus” first-year depreciation deduction on the cost of qualified business property placed in service. The 100% deduction is being gradually phased out. For 2025, the deduction is equal to only 40% of the cost. It is scheduled to reach zero after 2026 unless Congress revises the rules.
The determination of when property is “placed in service” depends on when the business property is ready and available for a specific use, regardless of whether it’s actually used at the time. Thus, if new equipment is installed on a plant floor and is operable before January 1, 2026, the deduction is generally available in 2025.
Facts of the new case: A company, a chartering operation, was already in business in 2015. It traded in an old yacht for a new one in December 2016. This was an upgrade and cost the company $2.65 million. The sale was closed on December 15, 2016. The new yacht was in ship-shape at the time of the trade-in.
According to the yacht’s logbook, the company immediately started cleaning the yacht, learning its various systems and planning its first trip on the water. These chores took between December 16 and 21. Then the owners took a personal trip the following week, but the maiden voyage with customers didn’t occur until 2017.
The IRS contends that there is no genuine dispute that the new yacht became depreciable in 2017. That was when the first chartering expedition took place. But the company owners argued that there is very much a legitimate dispute about exactly when the yacht became depreciable. In their view, the boat was ready and able to be used for its intended purpose in 2016. They said that sailing on the open water and their personal trip during Christmas week proves their point.
Examining all the evidence presented, the Tax Court questioned if the yacht was in its “completed form” for its “specifically assigned function.” Rather than reaching a conclusion at this time, the Court ruled that this was a factual issue to be decided in a later trial.
Moral of the story: The exact time that qualified business property is placed in service is not always clear. Take depreciation-based tax breaks when you’re on firm ground.
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Tags: Income Taxes, IRS, property taxes, Taxes
