Discussion Questions
1. X provides billing services to its customers. In Year 1, X pays amounts to purchase 50 scanners to be used by its employees. Assume each scanner is a unit of property and costs less than $200 per year. In Year 1, X's employees begin using 35 of the scanners, and X stores the remaining scanners for use in a later taxable year.
Do the scanners meet the definition of materials and supplies found in Reg. Sec. 1.162-3?
How should X take a tax deduction for the cost of the scanners?
How would your answer change if X elects the de minimis safe harbor?
2. X operates a fleet of specialized vehicles that it uses in its service business. Assume each vehicle is a unit of property. At the time it purchases a new vehicle, X also acquires a substantial number of rotable parts that it will keep on hand in a store room to quickly replace similar parts in the vehicles that break down or wear out. When a part in a vehicle breaks, X replaces the part with one in the supply of parts, fixes the original part and puts the original part back in the vehicle. The rotable part is returned to the store room for future use.
In Year , X purchases the rotable part for $200. In year 2, X uses the rotable part to replace a broken part as described above. In year 3, X retruns the broken part in the vehicle and returns the rotable part to the store room. At that time the value of the rotable part is $150. In year 5, X can no longer use the rotable part and disposes of the part.
If X does not use the optional method, when can it deduct the cost of the rotable part?
How would your answer change if X uses the optional method?
3. X buys a fleet of freight cars that it uses in its business. The freight cars have a class life of 14 years. Periodically, X must recondition the freight cars.
If X expects to recondition the freight cars only once during the 14 year period, how would it treat the cost of reconditioning the cars?
How would your answer change if X expects to recondition the freight cars twice during the 14 years?