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Tax Guru-Ker$tetter Letter
Monday, October 11, 2004
 
Section 179 & Trade-Ins
This Q&A from about a month ago would be a little different if the pending law goes into effect limiting the Section 179 deduction for vehicles between 6,000 and 14,000 pounds to just $25,000 per year.

For anyone who hasn't picked up on it, I am dead set against this new limitation - not because I'm a fan of buying big vehicles just for their tax benefits (I am not) - but because it is unnecessary meddling by our DC rulers into the operations of small businesses. If small businesses are allowed to expense up to $102,000 of new business equipment per year, the owners should be able to decide how to allocate that amount. If they choose to blow most of it on big trucks and SUVs rather than other kinds of machinery and equipment, that should be their right. I know I'm being an idealistic capitalist here, in wishing for our rulers to stop trying to micro-manage our business decisions.

A reader asked:

Thanks in Advance for the advice.

In 2002 I put a vehicle into service and took the 24k first year deduction. I am interested in trading it in for a newer vehicle that would also qualify. Can you tell me how that is interpreted? Do I have to recapture my deduction?

Here are basics

2002 purchase $36,000

2002 deduction $24,000

2003 deduction $ 3,000

Value is approximately $23,000 now, but I have depreciated it to $9,000 (is that correct?)

Does this mean if I get rid of it now I would have to claim a $14,000 gain?

And if so, assuming I purchased something for $50,000 that would qualify for sec 179 would my first year write off be $36,000.

Thanks so much.

My response:

There is a difference between whether you trade your old vehicle in or sell it in a separate transaction.

Assuming a half-year's depreciation ($1,500) for 2004, your book value of the old vehicle would be $7,500. If you sell it for $23,000, you will have taxable depreciation recapture of $15,500.

If you were to trade in the old vehicle towards the new one, there will not be any gain or depreciation recapture to worry about. Assuming the vehicle is over 6,000 pounds and is to be used 100% for business, you will be able to claim the Section 179 deduction for the additional amount paid for the vehicle on
top of the trade-in value. In your example, that would be $27,000 (50 - 23).

If you were to sell the old vehicle and buy a new one for $50,000, you would have the $15,500 of depreciation recapture gain; but you could claim the full $50,000 as Section 179 on your Federal tax return. While at first look, this might seem like a better deal than a trade, there are some issues to consider.

First is the maximum Section 179 deduction. While the Federal limit of $102,000 is more than most people need, many states haven't conformed to that higher limit and are still using the old limits of around $24,000 per year.

Another issue is that if you bought a lot of new business equipment, this option would only leave $52,000 of Section 179 for other items. The trade-in approach would leave $75,000 (102 - 27) available to be used on other items.

I hope this helps you work out your game plan. As always, I strongly advise working with a tax pro who can crunch your actual numbers and tailor a strategy that's best for your situation.

Good luck.

Kerry Kerstetter


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- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/11/2004 09:37:00 AM Send this post:

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