A U.S. Court of Appeals has ruled that trucking companies may deduct state license and permit fees and prepaid insurance premiums as current expenses in the year they are paid,
even when their effective benefits extend into the next tax year.
The ruling overturns a decision by a U.S. Tax Court which said that U.S. Freightways had to capitalize the expenses over their useful life. The carrier argued that an informal one-year rule allows an expense to be deducted in the year paid when the benefit extends less than 12 months into the subsequent year. The Tax Court rejected that argument, countering that the one-year rule isn’t well established and, even it were, U.S. Freightways couldn’t use it because it uses the accrual method for financial accounting -- i.e. expenses are shown in the period they are incurred. The American Trucking Associations filed an amicus brief in support of U.S. Freightways.
The U.S. Court of Appeals for the Seventh Circuit sided with U.S. Freightways and ATA, ruling that “the decision to expense or capitalize a particular item should not turn on whether the taxpayer uses the cash or accrual basis of accounting.” It also concluded that the kind of expenses at issue in this case were fixed, one-year items where the benefit will never extend beyond that one-year term, and that they are ordinary, necessary and recurring expenses for the business in question. Under IRS rules, they may therefore be treated as deductible expenses in the year paid, the court said.
The decision, U.S. Freightways Corp. v. Commissioner of Internal Revenue, No. 00-2668(7th Circuit. Nov 6), can be found on the Internet at www.ca7.uscourts.gov.