Q:

Subject: Section 179 Deduction

 

Dear Kerry,

 

Just a short question.  If I set up a company (sole proprietor or partnership) and purchased a large piece of machinery (punch press for $90,000.00), then lease (5 years) it to a corporation (that I own 15%) does it qualify for a Section 179 Deduction on my 1040?

 

Thanks in advance for your prompt reply.

A:

As always, this kind of thing needs to be discussed and evaluated with your own personal professional tax advisor.

The short answer to the way you described your proposed investment is probably not.  If you look at this excerpt from IRS Pub. 946  you should be able to see the fatal flaw in that particular arrangement.

Leased property.   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. (This rule does not apply to corporations.) However, you can claim a section 179 deduction for the cost of the following property.

1. Property you manufacture or produce and lease to others.

2. Property you purchase and lease to others if both the following tests are met.

1. The term of the lease (including options to renew) is less than 50% of the property's class life.
   
2. For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property.

Your personal tax pro should be able to help you set up thing in such a way as to work around this restriction, such as by possibly setting up a new corp to buy and lease the machinery.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/14/2006 03:27:00 PM Send this post: