Question: Assume you are a CPA. A new client, Mark, a local chiropractor, has brought you the financial information for his business at the close of the past year. Previously, Mark prepared his own tax returns and had them reviewed by Blacke & Co. You find the information to be organized and fairly straightforward. Mark does bring one recent transaction to your attention. He sold an x-ray machine for $10,000 near the end of the past year. The machine cost $25,000 three years earlier. Mark did not deduct depreciation expense in the year of acquisition. His business incurred an operating loss that year. Therefore, Mark "saved" some of his basis and did not report a loss as big as he could have. For the following year and for this year, Mark recorded depreciation of $5,000 annually. He tells you that he would like to "reclaim" the depreciation he did not deduct in the year of acquisition. He insists there will not be a problem because he could have taken the depreciation 3 years ago.

Also, by applying it to the adjusted basis for the sales transaction, he will not report a loss. So the recognized loss will not be used to offset other income. Advise Mark on the propriety of this transaction. You may wish to consult the Statements on Standards for Tax Services. Write Mark a letter explaining his situation.