Contractor Not Responding to Collect Payment???

[mgc6288]

Last October 2023 I had a contractor finish remodeling / repairing unit 1 and then finish remodeling / repairing unit 2 in December 2023.  The first unit he invoiced for while the second unit he never did but he did provide an estimate for.  As I did before he started the work, I asked him again for his W-9.  He never responded.  To this day I have not heard back from him.  

Unit 1 was in service last October 2023 while unit 2 was placed into service last January 2024.  

Because unit 1 was a non-descriptive invoice I went ahead and did the whole thing for a 27.5 year depreciation starting October 2023.  I figured at the time that he would eventually come around for his money.

However unit 2, without an official invoice, I am presuming the descriptive estimate is good enough?  Within this estimate there are some portions which can be expensed out or De Minimis however some will need to be depreciated over 27.5 years.  

Since depreciation starts at time of placed in service I'm wondering if I should go ahead and expense the non paid for invoice / estimate???  At first I figured I'd just hold off but there is a 5 year statute of limitations where I imagine he could come around and try and collect since the work was done.  

Is it more wise to simply depreciate both units over 27.5 years but then have to "recapture" this down the road if he never does collect or should I still "expense" the portions of unit 2 even though I haven't paid him anything? 

If I do nothing then I'm concerned that I just lost years of depreciation on a very long 27.5 year recovery.  Thoughts?

[AmeliesUncle · Accepted solution]

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@mgc6288 wrote:

Within this estimate there are some portions which can be expensed out or De Minimis however some will need to be depreciated over 27.5 years.  

should I still "expense" the portions of unit 2 even though I haven't paid him anything? 

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If you are using the De Minimis election, that is not a depreciable asset.  That means the expense is deducted when you pay it.  In other words, you can't deduct that now because you haven't paid it.

As for the depreciation, that is tricky.  It has been a year and he hasn't asked for payment?  Personally, at this point I would be doubting if he will ask for payment.

If you think you eventually will pay for it, yes, you can claim depreciation now.  However, if you are doubting that you will need to pay for it, personally, I don't think I would claim it now.   If you decide not to claim it but it  turns out that you eventually do pay, (a) if it was only one year, you can amend to claim it the prior year, or (b) if it was more than one year of tax returns, you can go to a tax professional to file Form 3115 to 'catch up' on the missed depreciation.   But in my opinion it seems to be a decision that you need to make, rather than any clear-cut answer for what you 'should' do.

[mgc6288]

I was guessing I couldn't expense what wasn't already paid but depreciation starts at the time unit was placed into service which was January 2024.  

I guess if he shows up out of the blue within the 5 year statutes of limitations then I will be required to pay him.  I'll just hold his money until then.

What if I were to simply depreciate the entire unit 2 over 27.5 years with the assumption that he wants to be eventually paid but then he never shows up within the 5 years? 

Do I stop the depreciation once it is determined that I will **not** be paying him or do I continue but then have to make some kind of adjustment later on?  

I'm attempting to watch my six in wasting 5 years of waiting to see if he wants to be paid, then at the last minute demands payment and now I've postponed a very long depreciation cycle another 5 years.

[AmeliesUncle]

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@mgc6288 wrote:

What if I were to simply depreciate the entire unit 2 over 27.5 years with the assumption that he wants to be eventually paid but then he never shows up within the 5 years? 

Do I stop the depreciation once it is determined that I will **not** be paying him or do I continue but then have to make some kind of adjustment later on?  

I'm attempting to watch my six in wasting 5 years of waiting to see if he wants to be paid, then at the last minute demands payment and now I've postponed a very long depreciation cycle another 5 years.

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That is tricky.  Maybe going to a tax professional to file Form 3115 to 'pay back' the depreciation deductions.

Yes, you would stop.  And as my last paragraph said, you may need to 'pay back' the depreciation deductions.

You would not be postponing the depreciation cycle.   If you did not claim depreciation and then he collects in year 5, you would go to a tax professional to file Form 3115.  That would 'catch up' on years 1-5 and you would continue depreciation for years 6-27.5.