Build Net Worth by Using Depreciable Antiques in Your BusinessTax Planning
Here’s a good business rule to follow: buy low and sell high.
But here’s an even better business rule:
- Buy low.
- Depreciate to zero.
- Sell high.
You can accomplish this by using antiques in your business.
Let’s say you narrowed the purchase of your business desk to either an antique desk or a regular one. Each desk sells for $5,000.
Which desk gives you the best possible business result? The antique.
Is the difference worth thinking about? Yes, the difference is absolutely worth thinking about!
Let’s say you buy the antique and Fred, your buddy, buys the new desk. You each use your desks for 10 years and then sell them.
- You sell your antique desk for $15,000.
- Fred sells his regular desk for $500.
You are kicking Fred’s you-know-what when it comes to selling results. But to see the true financial results, you need to look at the after-tax numbers.
Let’s say that both you and Fred are in the 35 percent income tax bracket and 15 percent capital gains bracket at the time of sale. On the $15,000 proceeds from the sale of your antique desk, your federal taxes are
- $1,500 on the $10,000 capital gain part of your profits ($15,000 selling price - $5,000 original basis x 15 percent);
- $1,750 on the $5,000 of depreciation recapture ($5,000 original cost depreciated in full, recaptured and taxed at the ordinary income tax rate of 35 percent).
After taxes, you pocket $11,750 on the sale of your antique desk ($15,000 - $1,500 - $1,750).
On Fred’s sale of his regular desk, he pockets a measly $325 after taxes ($500 sales proceeds - $175 in recapture taxes).
The antique desk gives you 36 times more cash than Fred’s desk gives him ($11,750 compared with $325). Imagine how you could beat Fred like a rug with an entire office full of antiques!
Ton of Logic
If you can buy an antique car, clock, rug, desk, cabinet, bookcase, paperweight, conference table, chair, umbrella stand, coatrack, library table, or other asset that will function in your business just as well as a new purchase, take the antique that might increase in value. It simply adds to your net worth.
How many business assets have you bought and used in your business that have gone up in value?
If you are like most businesspeople, the answer to this question is “none” or “very few.” In fact, you may not have considered antiques at all.
But now that you know their business potential, give antiques a serious look. With antiques, you can get the best of all worlds:
- beautiful assets you use in your business,
- assets you can depreciate and/or Section 179 expense against your business income, and
- assets that can increase in value.
If you were to buy antiques for your business today, you could expense up to $1,160,000 of qualifying costs using Section 179 expensing.
Say Thanks to the Musicians
Many years ago, antiques could not produce depreciation deductions. But that has changed thanks to two musicians who fought hard for us.
It began back in 1984 when a professional violinist named Brian Liddle walked into a Philadelphia antique shop and bought a $28,000 17th-century bass violin made by the famous Italian craftsman Francesco Ruggeri. Mr. Liddle didn’t simply display his Ruggeri. He played it during performances.
Over time, the instrument began to wear down. Although he had it repaired, the Ruggeri never recovered its “voice.” So, in 1991, Mr. Liddle traded the violin for an 18th-century bass violin with an appraised value of $65,000.
While all this was happening in Philadelphia, a strangely parallel series of events was unfolding up the New Jersey Turnpike in New York City. In 1985, a gentleman named Richard Simon, who played violin for the New York Philharmonic Orchestra, bought a pair of 19th-century French Tourte bows with appraised values of $35,000 and $25,000.
Like Mr. Liddle, Mr. Simon actually used his bows to perform. Like Mr. Liddle’s Ruggeri, Mr. Simon’s Tourte bows began to wear out. And like Mr. Liddle’s violin, Mr. Simon’s bows appreciated in value on the antiques market even though they were “played out” musically.
On his 1989 income tax return, Mr. Simon claimed accelerated cost recovery system (ACRS) depreciation deductions on the bows. 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 decided to consolidate the cases and deal with them together.
The Courts’ Rulings
Assets qualify for ACRS depreciation as long as they’re actually used in a trade or business and suffer wear and tear.
Mr. Liddle’s Ruggeri violin and Mr. Simon’s Tourte bows met both prongs of the test, the courts reasoned. The taxpayers didn’t treat the instruments as mere showpieces 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 just like any other business asset that wears down as a result of use.
In both the Liddle and Simon cases, the appeals courts upheld the Tax Courts’ rulings that professional musicians who use antique and collector violins and bows in their orchestral performances can claim depreciation on these items as business assets.
The musical instruments in these cases were almost 300 years old when they were purchased for about $30,000.
After being used in business for less than 10 years and depreciated to zero by the musicians, the instruments were worth about $60,000.
The courts noted that before the Economic Recovery Tax Act of 1981 (ERTA) changed the depreciation rules, antiques could not be depreciated, no matter how often they were used in business.
According to the Tax Court, the Second Circuit Court of Appeals, and the Third Circuit Court of Appeals, you and these musicians may now depreciate and Section 179 expense antiques.
ERTA eliminated the useful-life rules and put in their place statutory depreciation periods that we use today with MACRS (modified accelerated cost recovery system) depreciation. That change means that you now qualify for tax favored expensing and depreciation when you
- physically use the antiques in the normal course of business; and
- subject the antiques to wear and tear as you do any other assets.
The IRS Position
The IRS did not agree with the results in the Liddle and Simon cases and issued a formal non-acquiescence in 1996, stating that it would attack taxpayers seeking antique depreciation in the other seven circuits. This was 28 years ago. During this 28-year period, the IRS has not successfully attacked antique depreciation and has rarely mentioned the issue.
As we discuss below, we think it unlikely that the IRS will attack any depreciation on an antique physically used in your business.
The IRS certainly is not going to attack antique depreciation if you live in Vermont, Connecticut, New York, New Jersey, Pennsylvania, Delaware, or the Virgin Islands. Why? These are the areas covered by the Second and Third Circuit Courts of Appeals where Liddle and Simon had their Tax Court wins affirmed at the appellate levels.
Further, beginning shortly after ERTA, lawmakers improved taxpayer rights. Now the courts can order the payment of attorney fees when the IRS brings a case that is “not substantially justified” and you or your business meets the net worth requirements. The IRS, in its Publication 556, explains “not substantially justified” as follows:
The position of the United States is presumed not to be substantially justified if the IRS
- did not follow its applicable published guidance (such as regulations, revenue rulings, notices, announcements, private letter rulings, technical advice memoranda, and determination letters issued to the taxpayer) in the proceeding (This presumption can be overcome by evidence.), or
- has lost in courts of appeal for other circuits on substantially similar issues.
If you live in a jurisdiction outside the Second or Third Circuit, you also are not likely to face an IRS attack on your antique depreciation, for two reasons:
- The IRS has already lost in other courts of appeal—the Second and Third Circuit Courts. (Thus, bringing a case along the lines of Liddle and Simon and losing would clearly be “not substantially justified” and could require the IRS to pay attorney fees.)
- With the possible exception of the Hoakison case discussed below, the IRS has not made any new challenges since it issued its non-acquiescence in 1996.
Your Tax Preparer’s Position
Your tax preparer can rely on Liddle and Simon as meeting the “more likely than not” standard for tax deductions.
This is the standard that’s met when there is a likelihood greater than 50 percent that the deduction position will be upheld.
The “more likely than not” standard is better than the “substantial authority” standard, albeit your preparer also gains substantial authority with Liddle and Simon and thus has both standards met for antique depreciation and/or Section 179 expensing.
All of this means that your tax preparer has no exposure to tax law penalties because of your antique deductions.
Artwork Doesn’t Make the Deduction Grade
Antiques are deductible when they suffer wear and tear from physical use in the business. In Noyce, the court found a painting was not deductible because it did not suffer substantial wear and tear through its regular, active, and physical use in a trade or business.
You Beat the Antique Dealer
When you can use an antique in your business, you pocket more cash than the antique dealer would pocket.
At the time of sale, the antique dealer deducts the cost of the antique as a cost of sale. The profit is subject to ordinary income taxes and, if the dealer is self-employed, to self-employment taxes.
As a businessperson, you have the following advantages over the antique dealer:
- You can deduct your cost of the antique at the time of purchase using depreciation and/or Section 179 expensing (the dealer has to treat the antique as inventory and gets no deduction for the antique’s cost until the sale takes place—maybe a year or so after purchasing it).
- The profit in excess of your purchase price is a Section 1231 gain (because the asset is used in your business). Assuming no offset with Section 1231 losses, your Section 1231 gains on the sale of antiques used in the business for over a year are treated as tax-favored long-term capital gains.
You may already own antiques that you are using in your business and that you have not deducted because you were following the old rules.
You may now claim the benefits from the overlooked depreciation this year by retroactively claiming what you missed, using IRS Form 3115.
Example. Fifteen years ago, Sam Aspen bought an antique clock to dress up the entryway to his office. At that time, he and his tax preparer decided that they would not depreciate the clock because it was an antique.
Today, realizing that he can deduct this antique clock because he physically uses it in his business, winding it every week, Mr. Aspen files IRS Form 3115. This puts all of that clock’s prior years’ depreciation on this year’s tax return.
Mr. Aspen is very happy with this newfound tax deduction.
You have to love the two musicians who took on the IRS to win depreciation deductions on their antique musical instruments. There must be something about orchestras. Over the years, musicians from orchestras have won a variety of court cases on business tax issues ranging from the home-office deduction to antiques depreciation.
If you have the type of business in which you can choose an antique as a functioning asset in your business, the antique is the best choice because a properly acquired antique
- will increase in value and produce tax-favored long-term capital gains when sold, and
- is eligible for immediate expensing under Section 179 or, if you prefer, depreciation over time.
Antiques likely beat your non-antique assets by five, 10, 15, 25, 35, or more times in adding to your net worth. They are definitely tax-favored assets that add extra cash to your business. You owe it to yourself to give antiques serious consideration as asset purchases for use in your business.