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Ask the taxgirl: Taking Deductions When You Don’t Pay the Expenses

April 12, 2010 · 9 comments

Taxpayer asks:

Thanks for your blog, I really enjoy it.

I have a question about deductions. I went to school for business but long story short, couldn’t find work and moved back home. I decided to follow my original passion and open a photography studio. Since I didn’t have a job, my mother bought all of my equipment. Can I deduct the cost of the equipment on my taxes even though I didn’t pay for it? What if I promised to pay her back?

Taxgirl says:

First of all, congrats on opening the photography studio! As a fellow entrepreneur, I think it’s very cool that you’re following your dreams.

The easy answer to your question is no. If you didn’t pay the expenses, you can’t take the deduction (or amortization/depreciation, depending on the nature of expenses).

I’m a little confused, though, by the last bit. It sounds like you’re asking whether you can make it a loan after the fact (or maybe you already agreed to pay her back?). If that’s the case, my answer is perhaps. But it would need to be a bona fide loan. Just cause your mom isn’t Citibank doesn’t mean that you can just wander through the kitchen and nonchalantly mention that you might pay her back some day and call it a loan. It needs to be documented, with paperwork and proper interest. And it needs to actually be paid back.

The IRS scrutinizes related party transactions, including loans, for business purposes pretty closely. So if this is a loan – and not a gift – you need to take it seriously.

But if this is a gift – and never meant to be a loan – don’t make things more complicated than they need to be just to eke out some tax savings that you’re not entitled to. You’ll just get the both of you in trouble. Instead, give your mom a big hug and a kiss (and tell her thank you – again!) for helping you out. She sounds like good people. And then find an apartment.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl!Now on Facebook at http://www.facebook.com/taxgirl

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{ 7 comments… read them below or add one }

1 Bobby Huang April 12, 2010 at 7:26 pm

“Instead, give your mom a big hug and a kiss (and tell her thank you – again!) for helping you out. She sounds like good people. And then find an apartment.”

That last part had me cracking up. Well, back to learning!

2 Tom April 12, 2010 at 8:36 pm

If Mom bought the equipment, and gave it to child; wouldn’t Mom’s cost basis transfer (carry-over) to the child? Would this not give child basis that could be depreciated?

Buying depreciable assets and giving them to the taxpayer seems different from Mom paying for deductible items like office supplies, rent or taxes.

3 Kelly April 12, 2010 at 9:04 pm

Tom, I stand corrected. I think you’re right with respect to traditional depreciation. I guess I was thinking more along the lines of Section 179 deductions and other expenses. But I think child would be allowed to take depreciation on those assets, thanks!

4 richard April 13, 2010 at 8:35 am

I think there is a plausible case for current deduction of the photo equipment, assuming section 179 permits, for exactly the same reason depreciation should be allowed. There is not much economic difference between mom giving child cash that child uses to buy equipment (clearly deductible by child), and mom just buying it directly for him. I think there may be some law on this where mom pays child’s deductible taxes: child should be able to deduct them because it is the equivalent of a gift of cash followed by child’s payment of his taxes out of the gift.

5 Kelly April 13, 2010 at 11:35 am

Richard, I don’t think that section 179 would allow the deduction in any case.

And I disagree with the economic difference idea – the IRS does care about form. For example, if you substitute “pay mortgage” (or health care expenses, assuming child is not a qualifying dependent) for “buy equipment”, you have a very different answer. If mom gifts child cash to pay the mortgage, child can take deduction. If mom pays mortgage, child cannot take the deduction. So, the form of the transaction matters.

I think it would have been smarter – from a tax perspective – to give the cash outright and let the child pay the start up costs on his or her own. But I’m guessing mom had her reasons…

6 bob May 9, 2010 at 7:52 am

what if the photographer “bought” the equipment and paid the expenses on a credit card, and mom later paid the card balance????

is that different from mom buying the stuff and paying the expenses outright???……

or mom giving cash on the front end?????

mom made a gift….either constructively in cash, or in-kind

i would claim depreciation and deduct the expenses in each of the 3 cases…they are all essentially the same….and if IRS disagreed so be it…

i do see your point on sec 179 and its “original use” requirement……tho i believe that your interpretation favors IRS over the taxpayer….i would claim the sec 179 deduction on the basis that it was essentially equipment purchased with a cash gift

its okay to disagree with IRS, so long as you have a supportable position, which i think exists here

regards

bob

7 Kelly May 9, 2010 at 9:51 pm

Bob, thanks for your comment. I think there are other issues on the Section 179 side, though, esp. the related parties restriction.

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