ELITE ADVISOR BEST PRACTICES
Using Office Antiques to Boost Net Worth, Cash and Aesthetics - Part One
Just make sure you and your clients know the rules before claiming tax deductions for fair business use.
(first in a series)
By Glenn Demby
- Antiques can generally be expensed and deducted when the small business owner uses them to conduct business and subjects them to wear and tear.
- Because antiques typically appreciate over time while non-antique versions of the same asset diminish in value, owning antiques can significantly increase your clients’ net worth.
- All kinds of antiques can be used as business equipment and furniture, including cabinets, bookcases, rugs, conference tables, paperweights, clocks, cars and musical instruments.
- However, Plain Jane versions of those same items may not be deductible, even if your client paid top dollar for them.
What did the small business owner do wrong?
Ned Worth, an avid antique collector, is sorely tempted to bid $5,000 for an 18th-century Chippendale piece and use it as his office desk. But, alas, Ned needs to depreciate and expense his office desk for tax-deduction benefits. So he doesn’t bid. Ned winces when the auctioneer’s hammer comes down. The next day he spends the same $5,000 that he would have spent at auction on a pedestrian desk from Office Depot.
What did Ned do wrong?
Answer: Ned could have deducted and expensed the antique desk. He’d have gotten the same tax deductions and Section 179 expensing benefits with either desk. But while the Plain Jane desk will decline in value over time, the Chippendale desk will increase. By not buying the Chippendale desk, he now has three strikes against him:
- Strike 1: Doesn’t result in increased tax deductions;
- Strike 2: Takes a chunk of money out of his pocket; and
- Strike 3: Makes him sad.
Grab some pine, Ned, yer’ out!
Deductibility of office antiques
Desks are among the many antiques that small business owners, including your clients, can actually use to carry out their businesses. But what your clients—and you—may not be aware of is that these antique desks may be just as deductible as are desks that are not antiques.
Historically, the IRS has taken the position that antique desks and other business furnishings and equipment are not eligible for Section 179 expensing and/or depreciation. Why? Because they don’t have a determinable useful life. The IRS still feels that way, or so they said many years ago. But a number of federal courts have overruled the IRS.
The Liddle and Simon cases
Let’s go back to 1984 when a professional violinist named Brian Liddle walked into a Philadelphia antique shop and purchased for $28,000 a 17th-century bass violin made by the famous Italian craftsman Francesco Ruggieri. Mr. Liddle didn’t simply display his Ruggieri. He played it during performances.
Over time, the violin began to wear down. When the neck of the violin began pulling away from its body, Liddle had the instrument repaired by expert artisans. Alas, the Ruggieri never did recover its “voice.” So, in 1991, Liddle traded it for an 18th-century bass with an appraised value of $65,000.
On his 1987 tax return, Liddle had claimed a $3,170 depreciation deduction on the Ruggieri under the Accelerated Cost Recovery System (ACRS), as per IRC 168. The IRS denied the deduction and Liddle appealed.
While all of this was going on in Philadelphia, an eerily parallel series of events was unfolding up the New Jersey Turnpike in New York City. Richard Simon, a violinist for the New York Philharmonic Orchestra, purchased a pair of 19th-century French Tourte bows with an appraised value of $35,000 and $25,000, respectively.
Like Liddle, Simon actually used his bows to perform. And like Liddle’s Ruggieri, Simon’s Tourte bows began to wear out. Although “played out” musically, the bows appreciated in value on the antique market during the time Simon owned them, just as Liddle’s Ruggieri had appreciated despite losing its musical “voice.”
On his income tax return, Simon claimed ACRS depreciation deductions of $6,300 on one bow and $4,515 on the other. The IRS said “no.” The Liddle case reached the U.S. Court of Appeals for the Third Circuit; the Simon case went to the Second Circuit. The courts treated them as companion cases and issued one ruling covering both.
In both cases, the IRS claimed the instruments weren’t depreciable because they actually increased in value over the time they were used. But previous court cases allowing depreciation deductions on assets that had appreciated in market value forced the IRS to back down from that argument.
So the IRS argued that the instruments were “works of art” that didn’t have a determinable life and thus couldn’t be depreciated. In fact, the IRS’s determinable life theory disallowing depreciation of antiques had been the law of the land until 1981.
Unfortunately for the IRS, things had changed since then. In 1981, Congress enacted a law called the Economic Recovery Tax Act of 1981 (ERTA) allowing for ACRS depreciation of business assets. As both federal courts noted, the purpose of ERTA and ACRS was to stimulate investment by making the rules governing deductions for depreciation of business assets easier for taxpayers to understand and apply. Accordingly, ERTA was meant to de-emphasize the complicated concept of determinable life. Assets would qualify for ACRS depreciation, the courts explained, as long as they were actually used in a trade or business and had suffered wear and tear.
Liddle’s Ruggieri violin and Simon’s Tourte bows met both tests, the courts reasoned. The taxpayers didn’t treat the instruments as mere show pieces or collector’s items; they actually used them as tools to earn their livelihood. And such use caused the instruments to wear down. In this way, the antiques were considered the same as any other business asset that wears down as a result of use.
Bottom line: Liddle’s antique violin and Simon’s bows were business assets subject to ACRS depreciation.
Current law on deducting and expensing antiques
According to the Liddle and Simon cases, antiques can be expensed and deducted under two conditions:
- The taxpayer physically uses them to conduct business; and
- Such business use subjects the antique to wear and tear.
The risk of IRS opposition…
Caveat: In 1996—just a year after the cases were decided—the IRS issued a formal nonacquiescence, stating that it believed the cases “were wrongly decided” and that “the issue should be pursued in other circuits.” ACRS was meant to accelerate depreciation, not convert assets that weren’t previously depreciable, the notice argues.
...And why you shouldn’t worry about it
This may sound ominous, but there are good reasons not to allow the risk of IRS denial to scare you from advising your clients to expense and deduct antiques they use for business purposes. First, the Liddle and Simon cases are binding in the states of the circuits where the cases took place, including:
- The Second Circuit, which includes New York, Vermont and Connecticut; and
- The Third Circuit, which includes Pennsylvania, New Jersey, Delaware and the Virgin Islands.
However, the best reason not to take the threat of IRS opposition too seriously is that it’s more bark than bite. Our research uncovered not a single reported case in which the IRS has actually challenged Liddle and Simon and gone after a taxpayer for deducting and expensing an antique since the IRS issued its nonacquiescence way back in 1996.
Your clients can deduct and expense their antique office furnishings and equipment as long as they actually use them for business purposes and subject them to wear and tear. In Part 2 of this series, we’ll explain the enormous financial opportunities this little-known rule creates and what you can do to help your clients take advantage of these opportunities.