Q-1:

Subject: Yet another Section 179 question

 

We bought into a husband-wife partnership on 1/1/06.  The wife was a passive partner and withdrew and we paid the husband ½ of the FMW of the assets plus an amount for goodwill.  My husband and his partner are both active partners.

 

We are wondering if you can depreciate the physical assets of the company (not the goodwill, of course) given that they elected to do the 754 stepped up basis.

 

I don’t see a prohibition against applying 179 to 754 assets, but I don’t see it spelled out anywhere either.  The accountants are willing to file an amended return if they can find some definitive proof one way or the other as to whether or not we just bought an interest in the partnership or if we bought into the assets of the company.

 

I did find revenue ruling 99-5 that talks about a single person entity selling a partnership stake where the IRS treats the new partner as buying ½ of all the assets and then immediately contributing those assets to the partnership in exchange for interest in the LLC.  Does that also apply in our case?

 

Thanks – your blog is great.

 

Regards,

A-1:

I'm in the middle of the April 17 crunch, so I don't have time to do much actual research on this.  However, I have mulled it over for a few hours and my gut feeling is that I would not feel at all comfortable in claiming any Section 179 on your new buy-in to the partnership.

If you and your husband had purchased the assets from the partnership and placed them into service under your own personal names, the situation would be quite different.  As it is, I agree that you acquired an interest in the partnership and not direct ownership of business equipment, so no 179 is appropriate.  You do need to keep track of the amount of your personal basis in the partnership, but that doesn't entitle you to any more Section 179 than the partnership as whole can claim.

Another strike against you is the fact that Section 179 is only available for the first year an asset is placed into service.  You were obviously buying into assets that had been placed into service prior to 2006 by the partnership, so your 2006 purchase doesn't qualify as first placed into service.

I'm sorry I didn't have the answer I know you were hoping for.

Good luck with your partnership. 

Kerry Kerstetter

Q-2:

Hi Kerry,

 

I didn't figure you'd answer my question - we're going to revisit it this summer when we actually have time (as will the accountants presumably) later this spring.

 

Our attorney in the process thought what had happened was that we bought 1/2 of the assets from the practice and put them into our service during 2006 - he believed that since we could depreciate the assets, we could also claim the 179 deduction.  He thought the only sticking point would be the used status of those assets though.

 

It's an interesting theory and it's odd that there isn't more definitive stuff out there (at least what we could find) as to the yes or no of the issue - you'd think there'd be a statement/ruling that said, yes you can apply 179 to 754 assets, or no you can't.  We're not interested in being the test case, and since we're not losing anything in the long run (unless they change the laws) we're fine either way.

 

Thanks for taking the time to mull it over.  Good luck in the final crunch!

 

Regards,

A-2:

Section 179 can be claimed on used assets; so that was never a concern of mine.

Maybe I misunderstood the situation as to the new ownership of the assets.  I assumed they were still going to be showing up on the partnership's books and depreciated there.  In that case, no new Sec. 179 would be appropriate.

If, on the other hand, you and your husband have personal ownership of those assets and are setting them up for depreciation in your own business, separate form the partnership, a much better case could be made for your being allowed to claim the Sec. 179.

After the tax season crunch, your tax advisors should be able to better evaluate the proper way to handle this.  I assume you have filed an extension in order to give yourselves time to straighten this out.  It would be very dangerous for you to actually file your 1040 now without the Sec. 179 and then later try to file an amended return to claim it.  An amended return would result in much closer IRS scrutiny than holding off and filing an original return later on.

Good luck.

Kerry

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/23/2007 11:08:00 AM Send this post: