The simple made complex

guest commentary by David Potts

Our income tax system is complex. It has been for at least the last 30 years. That’s how long I’ve been a practicing accountant. I bet if we dusted off the Ouija board and asked the bulk of the dead old accountants that came before, they would describe the Internal Revenue Code as complex in their day.

Tax simplification is a hot topic. It has been for at least the last 30 years, probably longer. Current thinking seems to be that a flat tax or a national sales tax would be the best way to tax US citizens. And maybe it would. But our government has a way of making anything simple complex. Let me illustrate.

Is there anything simpler to understand than a repair expense? If you operate a business and you repair your building or a piece of equipment, that expense is a business expense that is currently deductible from your income. Or is it?

Currently the regulations state, “the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinary efficient operating condition may be deducted as an expense. … Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, shall either be capitalized and appreciated in accordance with Section 167 or charged against the depreciation reserve if such an account is kept.”

If you have a leaky roof and repair it, is the expense a current year deduction or a capital item that has to be depreciated over 39 years? Reread the above paragraph. It’s simple enough. What’s the correct answer? The correct answer is that it depends on the facts and circumstances of each case. In some cases it is deductible and in some cases it is not. If you review case law over the last 50 or 60 years you can get a better idea of what the courts think the regulations mean. But it took taxpayers fighting the IRS in court to better define the law.

The IRS proposed regulations in 2008 to help taxpayers better determine when a repair is a repair. But because these regulations are proposed and not published as final, therefore neither you nor the IRS can rely on the proposed regulations. Continued uncertainty.

My point isn’t to explain whether a repair is a deductible business expense or the purchase of a capital item that must be depreciated. My point is that the government can and usually does take something very simple and make it very complex. My point is that the promise of tax simplification is just a promise. If a flat tax or a fair tax ever became law, it would not be long before it became a complex flat tax or a complex fair tax. Tax laws are not created to implement good public policy. They are created to raise revenue for politicians to pay their political debts.

I heard Warren Buffett say in a television interview that each line of the Internal Revenue Code has its own constituency. He means each line of the Internal Revenue Code is influenced by a special interest group. Which special interest group influences the Internal Revenue Code depends upon who is in power at the time and their friends who “paid” the way.

Tax simplification? Not in my lifetime. But I hope I am proved wrong.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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