Depreciating Truck Tire Purchases
Trucking companies have been deducting the cost of tires on new and used trucks, tractors and trailers, when the vehicles are purchased.
The Tax questions that arise are:
- Whether the cost of the fair market value of the tires purchased for use on newly acquired trucks, tractors and trailers must be capitalized and recovered over an appropriate ACRS of MACRS class life or whether such cost or fair market value may be deducted in the year of purchase.
- Whether replacement tires on leased vehicles must be capitalized and depreciated or whether they can be expensed when placed in service.
To minimize disputes over the useful lives or original and replacement vehicles, the IRS released Rev. Proc 2002-27. It permits taxpayers to treat a qualifying vehicle’s tires as part of the vehicle, if they adopt the original tire capitalization (OTC) method for all qualifying vehicles. If tires last longer than one year and a taxpayer does not adopt the OTC method it must treat tires as a separate asset from associated vehicle and depreciate them over the appropriate MACRS recovery period (normally 5 years for trucking companies).
Original Tire Capitalization Method
1. Must capitalize the cost of the original tires of a qualifying vehicle and depreciate these tires by using the same depreciation method, recovery period, and convention applicable to the vehicle on which the tires are first installed.
2. Must treat the original tires of the qualifying vehicle as being disposed of at the same time the vehicle on which the tires were first installed is disposed of by the taxpayer; and
3. Must deduct the cost of the replacement tires of the qualifying vehicle as an expense in the taxable year the replacement tires are installed on the vehicle by the taxpayer
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