deduct this, bitch

in the spirit of it being finals season, a little tax hypo to get the blood flowing back the brain:

suppose taxpayer, T, wants to start a new business as a pimp. though T smacks bitches for fun, he has never done it as a means of living, so he figures he should do more research into it. thus, T purchases "The Bitch-Smacking Bible" for $5000 (it is so expensive because few copies are left in print). at the end of the taxable year, T attempts to deduct the entire $5000 as a business expense, but the commissioner, perhaps appropriately, says "Bitch i don't think so." what result?

to begin, section 162 of the IRC allows deductions for expenditures incurred in a trade or business. assume T forms his biz.

there are 3 requirements for the biz expense to be deductible:
1) the expenditure must be ordinary and necessary (section 162)
2) it must be in a profit making activity and not personal
3) it must be current and not capital

the bible seems to fit the first requirement, as it is logical to assume that a pimp must somehow learn how to effectively smack his bitches if he wants to turn a profit. a book seems to be a reasonable place to obtain this knowledge.

since T purchased the book to start his biz, it also meets #2. however, had T purchased the book simply to smack bitches in his free time, then it would fail this requirement and certainly would not be a deductible expense.

however, to be deductible, the bible must be current and not capital. the general rule is that if the expenditure will be effective in producing income for more than 1 year, then it is a capital expenditure, and it is not deductible under IRC 263. it seems pretty obvious that once T gains this knowledge, he can smack bitches to keep them in line and turn tricks for years. it would seem as though the cool 5Gs would NOT be deductible for that taxable year.

but all hope is not lost for T.

since the bible is a capital expenditure, the $5000 goes towards his basis in his biz. so, if he spent $10,000 to purchase his hos from the whore agency (for simplicity's sake we'll assume that was his only other expenditure. in reality, he would obviously also need some ice, a hat, and a cane, at a minimum), then his basis in his biz would be increased to $15,000.

but there is the chance that the bible could depreciate in value thru T's use. for example, T could be so mad at one of his bitches that he flips thru the book so vigorously that the pages tear. also, the bible is only made of paper, which wears over time. since the bible is linked to a profit making activity, and also is not for personal use, depreciation deductions are appropriate.

from here, T will have to determine whether he wants to use the 200% declining method, the straight line method, or some other method to determine depreciation deductions. however, since he is most likely under a half year convention, he will only receive half of the annual deduction for year 1.

however, under IRC 179, since the bible qualifies as "section 179 property" because its tangible property to which section 168 applies, T can elect to write off up to $100,000 of the total purchase price. since the purchase price was only $5000, T has the option of deducting the entire expense for the current taxable year.

at the end of the day this is probably a very happy story for all involved. T will probably take it easy on his bitches tonight. this will make them happy, and they will be more attractive to potential customers, probably creating extra biz. this means extra income for T, and probably a nicer hat.