Q-1:

Subject: oh great one

 

Can you tell me who is right on this:

 

Let’s say E and K, husband and wife own personal property that they place into service in their new office for their new business.

 

They draw up a bill of sale for these items to the new business – saying, E and K, as husband and wife, sell these items to New Business for $X.  Then they write a check from New Business checking account to E and K, husband and wife, and E and K cash said check.

 

E is a “member” of the new business.  K is not.

 

Can the personal property qualify as a Section 179 deduction since E and K, husband and wife (apparently for the legal eagles, that is a separate entity even from E or K individually) and K is not a member of the New Business.

 

It’s my understanding that you can’t sell things to yourself and take the Section 179 deduction.  HOWEVER, it appears from the arguments that I’ve heard that it really IS NOT selling it to yourself in this case.  That E and K are a separate entity from the New Business.with E ONLY being  a member of said New Business entity.  (E is an attorney and non attorneys are not allowed to be members of a law firm.)

 

What say you, oh great Guru? 

A-1:

This doesn't even come close to being in the infamous gray area.  That property would definitely not qualify for Section 179 because it is being acquired from a related party and is not an arm's length transaction, regardless of the technical ownership of the business.  IRS is very strict with attributed ownership between spouses and your scenario wouldn't pass muster with them or with any experienced tax pro.

You didn't say what kind of business entity (sole proprietorship, corp, LLC, etc) would be buying the equipment; but the answer wouldn't be any different for any kind of entity.

Out of curiosity, is this a real life scenario, a school homework question, or the musings of someone lost in pre new year's celebrations?

Kerry Kerstetter

Q-2:

Real life scenario.

 

1.  My Dh is an attorney.  Was a partner at a law firm.  Struck out on his own.  Set up 3 offices, a conference room, entry and bathroom.  Many things put into the new office were things we had in another house.  We moved those things from the 2nd house to furnish the new offices.

 

Dh argues that "E and K, husband and wife" are a separate legal entity from Ed Law Firm - and that we should be able to sell things to E Law Firm and E Law Firm should be able to deduct as Section 179.

 

I seemed to recall it saying you couldn't.....but had pause with this "husband and wife" entity argument.

 

2.  So - what if the furnishings were "owned" by another company owned solely by ME and then the furnishings were sold to E Law Firm?

 

He is not listed with my business and I'm not allowed to be involved in the law firm as ONLY lawyers can be partners or owners of a law firm.

 

I have an incorporation that is currently in place. 

 

I swear, it just doesn't seem right that just because we already owned this stuff that we can't get a deduction for it.  We WOULD have to purchase stuff for the office and would get the deduction if we bought it from someone else.  :shrug:

 

Any suggestions?

 

It is set up as a LLC.....we are pondering the S corp option now (albeit late, I know). 

 

Someone said that there are some objections to S corp for lawyers – something about personal services, etc.

A-2:

You really need to be working directly with a professional tax advisor in order to stay out of trouble.

IRS is very strict against allowing inflated deductions based on churning of assets, which is when one supposedly separate entity sells assets to another entity that is related to the one making the "purchase."  There is too much opportunity for abuse, such as your inflating the sales price above what the items would sell for to unrelated parties.

Every one of your proposed scenarios would be considered illegal churning because of the close relationship between the entities.  Playing with the ownership in your and your husband's name won't make it any less a related party transaction.

I have been in this business for over 30 years, and have earned a reputation of being very aggressive and creative in using the tax laws the best advantage.  I wouldn't dare try what you are proposing because it is very obviously churning. 

What you will be allowed to do is to start claiming normal depreciation deductions based on the realistic fair market values of the assets at the time they are being converted from personal to business use.  Don't try to depreciate the original purchase prices or you will run into IRS problems.

Again, an experienced tax pro can help you with this, as well as going over the many issues involved in deciding which kind of entity would be appropriate for your unique circumstances.

Good luck.

Kerry Kerstetter

Follow-Up:

I KNOW that a sharp tax advisor could help, but we fear the overzealous who can turn us into a bullseye and hate the idea on the other hand of paying what we don't have to.........:shrug:

 

We live in a 6,000 sq foot house.  2,000 sq ft are the 3 offices, conference room and entry.  The mortgage interest is about $4K per month.  It's my understanding that an S corp would take away the home office deduction.  It would help with self employment taxes though.  Not sure which way to go. The accountant that I'm working with first suggested S corp, but then I asked her about what deductions I'd be losing and she acted like I was a genius for that occurring to me.  That is NOT the type help I need.  I don't need any such surprises.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/03/2007 03:44:00 PM Send this post: