Q:

Subject:  Section 179

Can the two shareholders of an s-corporation take a loan to purchase a company vehicle and be able to get the 179 deduction?  The lender will not lend to the company but will personally to the 100% shareholders.
Time is of the essence to buy today or tomorrow
Thanks

A:

That is a very similar situation to the one I discussed in one of my earliest vidcasts regarding an LLC. 

LLCs and S corps are very similar for tax purposes, so this should help you.

As always, you should be working with an experienced professional tax advisor to make sure you set everything up properly.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/31/2009 04:52:00 PM Send this post:

These last few days of the year are historically very busy at car dealers, as people try to get their hands on a new business vehicle before New Year’s Day and thus qualify for the lucrative Section 179 deduction, especially for heavier (over 6,000 pounds) vehicles.

Amazingly, there are still a lot of people who believe that the Section 179 deduction is based on the amount of actual cash paid out for the new business equipment, as in this vidcast.  This is just one more of an endless stream of emails from small business owners who think they can handle their own tax affairs. Anyone working with an experienced tax pro would know that the Section 179 deduction is the same whether you pay cash for the full price or take out a loan for the full amount, or use a credit card. 

Likewise, credit card charges as of 12/31/09 are treated the same as 2009 cash payments for tax purposes.  These are almost always missed by taxpayers acting under the misguided assumption that they can come out ahead by avoiding the cost of a professional tax preparer.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/30/2009 02:52:00 PM Send this post:

Q:

Subject: Section 179 question

I found your organization via Google, and the information is very helpful!
I own a Dental Laboratory, and want to purchase a $33,000 cad cam system.  My question:  can I take advantage of a year-end purchase incentive by the manufacturer, and have the purchase documents dated December 2009, but take advantage of the section 179 deduction in 2010?  I won't begin using the new equipment until January.
 
Thank you for your help!

A:

You seem to have the opposite situation than most people present; when they want to claim Section 179 in the year prior to actually using the equipment.

If you don't actually place the new equipment into service until 2010, you shouldn't have any problem setting it up on your 2010 tax return's depreciation schedule and claiming Section 179, subject to the other limitations that could affect the actual deduction.

Your own personal professional tax advisor should be able to give you more specific advice on this.

Good-luck.

 Kerry Kerstetter 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/26/2009 12:58:00 PM Send this post:

Using multiple entities for tax, liability, and other business reasons has been a very common and useful strategy for longer than I’ve been in this business.  Why many tax pros are unaware or unwilling to recommend them is still surprising to me.

YouTube page

Labels: 179, corp, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/22/2009 03:08:00 PM Send this post:

You need to be careful about violating anti-churning rules.

YouTube page.

Labels: 179, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/18/2009 07:45:00 PM Send this post:

Another question that really depends on multiple factors.

YouTube page.

Labels: 179, Vehicles, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/10/2009 09:42:00 PM Send this post:

It’s not a cut and dried answer as to the maximum that can be claimed, as I explain in this vidcast Q&A.

If the embedded player doesn’t work, you can access the video directly on YouTube.

Labels: 179, Vehicles, video

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/08/2009 05:41:00 PM Send this post:

Q:

Subject:  Tax Issue

Is there any information as to what the 179 election and bonus depreciation will be in 2010? Thanks!

A:

This was in the recent CCH report of 2010 tax changes that I mentioned on my blog.

"Code Sec. 179 expensing. Unless Congress intervenes, Code Sec. 179 expensing will return to pre-2008 levels for 2010. For tax years beginning in 2010, the Code Sec. 179 expensing limit will be $134,000 and the cost-of-equipment limit set at $530,000. (Note: Expensing is currently scheduled to return to $25,000 ($200,000) levels in 2011.)"


Nothing was mentioned about any changes in the special first year depreciation, so that will expire as of 1/1/10 for most types of assets, unless our rulers in DC decide to pass another extension.

I hope this helps.

Kerry Kerstetter

Follow-Up:

I like the our rulers in DC comment. Kind of scary, isn't it! Thanks!

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/21/2009 05:55:00 PM Send this post:

Q-1:

Subject: LLCs and 179 deduction

Hi Kerry,

I recently did a Google search on Section 179 deductions and LLCs.  Your site came up, but I was unable to find any reference to how LLCs handle the 179 deduction on the site.  Can you point me to the right section?  Basically, I want to know if the 179 deduction flows through the LLC to the members personal returns like other profits and losses do.

Thank you for any help.

Cheers,

A-1:

Back in February, I sent you a link to a previous blog post I did on Section 179 deductions with pass through entities.  

Nothing has changed since then.  The Section 179 deduction is one of the separately stated items required to be passed through to the members via their K-1s.  The actual amount of Section 179 deduction each member will be able to deduct on their 1040s may be quite different, based on their unique tax situations.

Your LLC's professional tax preparer should have software to prepare the 1065 and its K-1s properly, while the members' professional tax preparers' software should handle their 1040 Section 179 properly.

I hope this helps.

Kerry Kerstetter

Q-2:

Hi Kerry,

Thank you so much for your note of September 6, 2009.  My accountant is adamant that a 179 deduction can only flow through to a single member LLC.  This opinion stands to cost me about $40k and beyond that logically drives me nuts.  Why would the deduction not flow to all the members, particularly in this case where the partners are my wife and I and we file a joint 1040?

Could you point me to something in the IRS or professional literature that clearly (a faint hope on my part) lays out the 179/llc ground rules?

You mentioned that you are thinking of setting up business related Webinars, I'm very interested.  Often those of us doing business are very interested in the deductions that are allowed in the conduct of business depending on the corporate form.  As you can see, from my own very painful situation, it would have helped to know that only single member LLCs can take the 179.

I would be very interested in being kept informed about your webinars and if there is any info on the multiple partner LLC (particularly husband and wife) I would be most appreciative.

Best Regards,

A-2:

There must be some kind of misunderstanding here because what you claim is your accountant's statement makes absolutely no sense. To claim that only single member LLCs can use Section 179 is ridiculous. I have seen and prepared thousands of tax returns with multiple owners sharing Section 179 deductions.

With a multi-member LLC that is reporting its activity as a partnership on Form 1065 or as an S corp on Form 1120S, the treatment is exactly the same.  Just as the net operating income or loss is divided among the owners on their K-1s based on their ownership percentages, Section 179 deductions are similarly allocated among the members' K-1s.

If your accountant uses professional software to prepare the 1065 or 1120S, it will handle that allocation automatically.

If your accountant prepares tax returns by hand and doesn't understand how to properly handle Section 179, it sounds like it may be time to move on to someone with more experience.  If it's a family member and you don't want to hurt his/her feelings by switching to a more competent tax pro, only you can decide if that is worth $40,000.

You asked for documentation of this.  How about the official IRS instructions for Form 1065, which you can download here.  

From Page 28:

Line 12. Section 179 Deduction
A partnership can elect to expense part of  the cost of certain property the partnership purchased during the tax year for use in its trade or business or certain rental activities. See Pub. 946 for a definition of what kind of property qualifies for the section 179 expense deduction and the Instructions for Form 4562 for limitations on the amount of

Complete Part I of Form 4562 to figure the partnership’s section 179 expense deduction. The partnership does not claim the deduction itself but instead passes it through to the partners. Attach Form 4562 to Form 1065 and show the total section 179 expense deduction on Schedule K, line 12.

Note that it says "Partners" with an S, meaning that the Section 179 is to be split between all of the partners.

Also from Page 28 is this statement of a limitation on the only kinds of partners who may not claim Section 179 deductions.

Do not complete box 12 of Schedule K-1 for any partner that is an estate or trust; estates and trusts are not eligible for the section 179 expense deduction.

Notice that there is no restriction mentioned regarding multi-member LLCs.

Good luck.  I hope this helps. Fur future reference, when a tax pro presents you with some claim that seems to be wrong on its face, you should demand that s/he present you with documentation to prove his/her point.  I would be very interested in seeing something official that states that multi-member LLCs are not eligible to use Section 179.

If you keep tabs on my blog, we will be announcing the dates of the webinars there.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/18/2009 06:15:00 PM Send this post:

Q:

Subject: Question about Section 179 Deduction

I was reading your website and had a question about section 179.

In 2007 I purchased an Expedition EL >6000 lbs. I took the $25,000 deduction, I am being audited and am being told that I can not take the milage deduction and the 179 deduction. I thought the 179 was a depreciation event and had nothing to do with deducting milage. Can you elaborate??

Thanks in advance

A:

I constantly warn people about the dangers of trying to prepare their own tax returns because it is all too easy to make simple mistakes such as the one you did.

With business vehicles, you generally have the option of claiming the IRS's standard per mile deduction or the prorated actual expenses based on business miles to total miles for the year.

The standard mileage rate includes a factor for straight line depreciation. This was 19 cents per mile for 2007.

The Section 179 expensing election is basically a kind of very accelerated depreciation. If you claim it, you are required to use the actual expense method for that vehicle and you are not allowed to use the standard mileage rate ever for that particular vehicle because that would result in double deducting the same depreciation.

There is no nice way to say this; but you screwed things up big time by trying to deduct both Section 179 and the standard mileage rate on the same vehicle. Any professional tax preparer with even limited experience would know better than to do that.

With that kind of basic error in your tax return, there's no telling what others you have as well, including many that probably cost you money. Before you go any further with the IRS auditor, you should hire a professional tax advisor to review your 2007 1040 and see if s/he can find some tax saving deductions that will offset the extra taxes that you are going to have to pay as a result of double deducting vehicle depreciation.

If you already prepared your own 2008 1040, you will also need to have a professional tax advisor fix the mistakes that it has.

I'm sorry to be the bearer of such bad news and I hope this helps you salvage some tax savings.

Kerry Kerstetter

Follow-Up:

Thanks for the quick response. The situation is not quite so bad, we found almost $20k in deductions missed.

Thanks again for your help

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/03/2009 09:52:00 PM Send this post:

Q:

Subject:  Re: section 179

Hi,

Thanks for your previous replies in the past. If you take a section 179 deduction can you still deduct  your businees mileage. O does the section 179 deuction fall under the itemised deductions therefore precluding mileage claims?

thanks

A:

You really need to be working with a professional tax advisor because you are mixing up different tax issues that are technically not connected.

As I have explained on several occasions, if you use Section 179 or any other accelerated method of depreciating a vehicle, you are required to use the actual cost method of calculating deductible vehicle expenses for that particular vehicle for as long as you own it.  You are not allowed to switch to the IRS's standard per mile rate because that rate includes a portion for deprecation and to switch to it would end up giving you double deductions for deprecation.

The issue of the standard personal deduction versus Schedule A itemized deductions is completely separate from the issue of how the vehicle costs are calculated.  As always, it's generally a good idea to keep track of all of your actual itemized deductions and use them on Schedule A if they are higher then the standard personal deduction.

I hope this helps; but you need to be working with a tax professional.

Good luck.

Kerry Kerstetter

Follow-Up:

Hi,

Thanks a lot.

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/19/2009 08:30:00 PM Send this post:

Q:

I do not understand the phase out concept for Sec. 179 accelerated depreciation. For 2009 for example, the maximum deduction is $250,000, so what does it mean to have higher phase outs? You would never claim more than $250,000, so how would it ever phase out?

A:

The expensing election under Section 179 was always intended to be for smaller businesses. To make sure that larger businesses weren't able to benefit from it, our rulers in DC added the phase-out thresholds based on the dollar amounts of equipment that were acquired during the year. The underlying concept is that, any company large enough to be able to afford those large amounts of new equipment purchases didn't need the additional tax help from Section 179 because their normal deprecation deductions would be large enough.

Whether this makes sense or not isn't the key. It's how our rulers have decided to limit the application of Section 179.

I hope this clears up any confusion you have.

Kerry Kerstetter

Follow-Up:

I get it now. By making sense, I did not mean in the ultimate sense, but in the limited sense of whether there was even an arguable policy rationale. Without one, I would not be sure whether the explanation was correct. Now I get it.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/11/2009 09:43:00 PM Send this post:

From a client with a 3/31/09 corp year-end:

Dear Kerry:

Our corp is considering purchasing a van such as a delivery van (GMC, Chevy, etc.). 

Could you please inform me of the IRS specifications that must be met to allow us to expense the entire amount.

Before we would purchase the vehicle I will check with you to make sure it meets the requirements.

Thanks.

My reply:

As you requested, here are the specifications for what a vehicle has to have in order to qualify for deducting all of its cost in the first year. Basically, these rules are most important if a vehicle either weighs less than 6,000 pounds or costs less than $25,000.

I excerpted this from my main tax reference source, TheTaxBook. Section 280F is the part of the tax code that severely limits the deprecation deduction for vehicles.

Vehicles not subject to Section 280F. The following vehicles are not subject to the depreciation limitations under Section 280F or any of the other listed property rules:
• Clearly marked police and fire vehicles.
• Unmarked vehicles used by law enforcement officers if the use is officially authorized.
• Ambulances used as such and hearses used as such.
• Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo.
• Bucket trucks (cherry pickers), cement mixers, dump trucks, garbage trucks, flatbed trucks, and refrigerated trucks.
• Combines, cranes and derricks, and forklifts.
• Qualified specialized utility repair trucks.
• Tractors and other special purpose farm vehicles.
• A vehicle used directly in the business of transporting persons or property for pay or hire, including school buses, and other buses with a capacity of at least 20 passengers.
• A truck or van that is a qualified nonpersonal-use vehicle.

Qualified nonpersonal-use vehicles.
These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company’s name. Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal-use vehicles.

Trucks and vans.
Trucks and vans are passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs) that are built on a truck chassis. They have the same definition as passenger autos, except that instead of unloaded gross vehicle weight, the definition is gross vehicle weight not more than 6,000 pounds. The Section 280F depreciation limits for trucks and vans are higher than the limit for cars.

Vehicles over 6,000 pounds.
Passenger autos rated at more than 6,000 pounds unloaded gross vehicle weight, or trucks and vans rated at more than 6,000 pounds loaded gross vehicle weight are not subject to the Section 280F depreciation limits. However, such vehicles may still be considered listed property for purposes of the other listed property rules, including the requirement that the vehicle be used more than 50% for business to take the Section 179 deduction.


Remember that the expensing deduction is only allowed if you actually place the vehicle into service before the end of your tax year. It won't be sufficient to prepay for it by March 31 and then take delivery later in your next fiscal year. You need to actually use it before the end of the day on March 31 in order to claim it on this year's tax return.

I hope this helps. Let me know if you have any specific questions.

Kerry

Follow-up:

Kerry:

Could you please let me me know if any or all of the following vehicles qualify for deducting all of the cost in the first year.

1)  2009 GMC Sierra 2500 crew cab pickup.  GVWR = 9600 lbs.  Bed length = 77 inches.  This is the same model we purchased nd were able to deduct in 2006.  Price = $39,480

2)  2009 GMC Savanna 12 passenger van.  GVWR = 9600 lbs.  The seats can be removed.  Price = $33,027

3)  The dealer also has the same model 2008 GMC Savanna available for about $21,000

Thanks.

My Reply:

I looked over the vehicle descriptions you faxed over and compared them to the rules for the first year expensing.

1.  Because the 2009 GMC Sierra has an exterior bed of larger than 72 inches, it would qualify for deducting the entire purchase price of $39,480 plus the sales tax.

2.  Because the 2009 GMC Savanna has seats for so many people, it would only qualify for a first year deduction of $25,000 of its purchase price.  The remaining cost would be depreciated over five years.

3.  Because the 2008 GMC Savanna costs less than the $25,000 limit, its entire $21,000 purchase price plus sales tax could be expensed in the first year.

Besides the fact that the vehicle needs to be actually placed into service before the end of 3/31/09, which I mentioned last time, another important point is that the dollar figure we are working with is after deducting any trade in value the dealer may give you if you are swapping another vehicle for the new one.  For example, with vehicle number 1 above, if you are receiving a trade in credit of $10,000, only the net cost of $29,480 will be available to deduct in the first year.

I hope this is clear and not too confusing.  Let me know if you have any more questions.

Kerry

Labels: 179, Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2009 07:40:00 PM Send this post:

Q:

Subject: 179 Question

There is a question which falls through the cracks of the answer provided below.  It's pretty clear from your answer that Corporations can not reduce income below zero using a 179 deduction, but that a Schedule C business can (provided that there is sufficient wage income to produce a total taxable income > 0.00).  However, what about a Partnership or LLC?  Can they have a loss based on a 179 deduction, and have the partner use it on their 1040 via a K-1, provided that they have sufficient wage income to have a taxable income remain > 0.00?

Thanks,

A:

I have discussed this point on a few occasions, but it has been a while.

With pass-through entities, such as S corps and partnerships, the Section 179 limit is tested against taxable income at both levels; that of the 1065 or 1120S and again at the owners' 1040 level.

One big difference is the fact that, for this test, the 1065 or 1120S income can be increased by any owner compensation that has been deducted, such as wages or guaranteed payments.  This could result in a Section 179 deduction giving the business a net loss.

From a logistical perspective, a 1065 K-1 would most likely net out to zero when taking into account the entries for net loss, Section 179 and Guaranteed Payments.  This contrasts with the K-1 from an 1120S, which could have a net overall loss because the W-2 income isn't shown on the K-1.

The interplay of these kinds of tests are why it is important to be working with an experienced professional tax advisor with up to date tax prep software.

I hope this isn't too confusing to follow.  You should work with your own tax pro to see how it would look with your own businesses.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2009 01:19:00 PM Send this post:

Q:

Subject: section 179 question

If I have taken section 179 expense deduction in 2006 and 2007 and have had to close my business in 2008 will I have to claim these deductions from these years as income in 2008?

Another question if you could please give me advice.  I installed new carpet, laminate flooring and countertops/cabinets in my leased office in 2008 could these items be considered section 179 expenses or are they items that could be classfied as building repairs or would I have to depreciate them and over how many years?

Thanks,

A:

You need to be working with an experienced professional tax advisor to make sure you do things properly here.

Basically, if you claimed Section 179 for business equipment on previous tax returns, the adjusted cost basis of those assets is zero.  This means that anything you receive for them in a sale is going to be taxable gain; technically a recapture of the previously deducted Section 179.

If you just shut down the business and don't sell off the assets, there will still be a smaller taxable recapture because their business usage has fallen below 50%.  Your personal professional tax advisor should have tax software that will calculate that recapture amount.

There are various ways in which your leasehold improvements can be expensed and/or depreciated.  Your personal professional tax advisor should be able to use the method most appropriate and beneficial for your unique situation.

I hope this helps.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2009 12:38:00 PM Send this post:

Q:

Subject: Section 179 for 2009

Hello Mr. Kerstetter,

My company is trying to publish some Section 179 information for our lessees. We are having a difficult time gathering some of the information. Your website typically lends itself to helpful and up-to-date facts. Is there a place I could go to better gather this information? I’ve looked at the IRS and their site is difficult to find what I need.

I’m assuming the first year write off is $128,000, but what is Cola?

Also, 2008 is the last year it lists a phase out $ amount.

Thank you,

We've been out of power for a while now, so I haven't been able to update my main website lately. I have attached the Section 179 chart from the latest edition of TheTaxBook.

As you can see, as it stands right now, the 2009 maximum Section 179 deduction is $133,000, which is the base of $125,000 plus an additional $8,000 for the annual Cost Of Living Adjustment (COLA).

As you can also see on this chart, the phaseout of the Section 179 deduction for 2009 begins at $530,000 of new equipment purchases, which is the base of $500,000 plus an additional $30,000 for the annual Cost Of Living Adjustment (COLA).

Preparing a completely accurate long term multi-year chart of the Section 179 limits is close to impossible because it is a favorite item to be changed by our rulers in DC. It is one of the best incentives for small business owners to invest in new equipment, so chances are good that it will be bumped up in future economic stimulation legislation.

As with all tax matters, it is a full time job just staying current on all of the changes; so be sure to include that in any tax related materials you produce. A warning such as "All information presented is subject to changes at the whims of the politicians in DC. Check with your own personal professional tax advisor before undertaking any tax related transactions" would help cover your rear in case someone relies on info you produce that becomes outdated.

Good luck. I hope this is helpful.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2009 01:50:00 PM Send this post:

Subject: Section 179 Suggestion

Hello Kerry,

I came across your site here today trying to make heads or tails of my deductions for a store I just opened. I found your explanation to be quite clear and easy to understand over the IRS one. I didn't completely understand the cut off for vehicles. Thank you.

I also have a suggestion. I think it would be great if you added a calculator for section 179. I found a good one that helped me as well here. I think it might help others as well to get an estimate on what their deduction will be. I hope this was of help.

Have a nice day,

I'm glad you found my info on Section 179 to be informative. It is meant to just be a starting point. Any actual calculations should be handled by your own professional tax advisor who can factor in the other criteria that will determine the actual expected tax savings. No online calculator can do a decent job of that kind of analysis.

For example, the one that you referred to is dangerously simplistic and incomplete in the information it works with and is really nothing more than a sales tool to make it appear that equipment costs less than it actually does. When I entered the figure of $100,000 in the Cost of Equipment box, it automatically assumed a tax savings of $35,000 for a net cost of $65,000. It didn't take into consideration some critical factors that could seriously limit the actual Section 179 deduction, such as how much other equipment was acquired during the year and the level of Taxable Income before any Sec. 179 deduction.



I don't mean to be harsh here, but one of the biggest mistakes I see constantly is people believing they can function in business without the assistance of an experienced professional tax advisor. While you may think this quick and easy calculator is helping you, it is almost certainly giving you the wrong information unless you are making huge profits and are in the 35% Federal tax bracket. Again, not to be cruel, but anyone making that kind of money is insane and financially irresponsible to try to navigate the tax waters on their own.

I'm sorry to dump on you here, but you pushed a button that needed expressing.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/14/2009 11:14:00 AM Send this post:

Q-1:

Subject:  Section 179 question

Can the date of purchase be defined as the date placed in service.  If payment is made this year, can it go toward next year's expense if not placed into service until then?

A-1:

You seem to be confused about when depreciation and Section 179 expensing become available for business assets.  The key date is when the asset is placed into service; so there isn't actually any choice here.  If you buy a new item this year and don't actually start using it until next tax year, the only year you could possibly claim Section 179 would be next year.

Your own personal professional tax advisor should be able to explain this to you in more specifics for your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

Thanks, but as a practical matter in my business (I sell software to dentists) the docs expense is when they write the check (or when they charge it to their credit card, or when the first lease payment is made.  Nobody comes around to see if it is being used and when it started being used.

So, you are saying they could opt to pay for it in 2008 and not place into service until 2009, therefore taking the deduction in 2009.  This is requested at the end of the year sometimes if the doc has used up as much 179 expense as he has profit for the current year.

A-2:

Normally, this question goes in the opposite direction.  People assume they can prepay for some business asset in December and claim Section 179 even though it isn't received or set up for use until next year.

As we all know, the tax system has a lot of the "honor system" built into it in regard to people claiming their deductions in the proper years.  However, IRS does occasionally audit tax returns to verify that things have been handled properly.  A canceled check is not sufficient documentation for a piece of business equipment or expensive custom software.  Auditors will demand to see the purchase invoice and will check the delivery and installation dates to see if the year placed in service matches that shown on the tax return.

I have to say that you are sticking your neck out quite dangerously by daring to give tax advice to your customers.  While they may play fast and loose with the technicalities of the years in which they claim their deductions, you run the risk of being sued by them if any of them were to get into trouble with IRS based on any such advice you provide.  The smart thing for you to do is to advise each of your customers to consult with their own personal professional tax advisors who can work out appropriate strategies for when to pay for and deduct the costs of your software.

Good luck.  I hope this helps.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/26/2008 10:09:00 AM Send this post:

Q:

Subject:  2008 Section 179

I found your info on the web. I have a quick question. I am looking at a cap gains tax on the capital account of an LLC which I left in January. The account is about $460,000 and the tax about $69,000.

I am considering starting a property restoration business and the equipment is about $20,000 to $30,000. I might also need a van. If I spend 30,000 on equipment, will that reduce my cap gains tax by $30,000 because I am deducting 100% up to $250,000?

Thanks,

A:

This is something that you need to work on with the assistance of your personal professional tax advisor because it is more complicated than you are assuming.

The first misconception you have is regarding how the Section 179 deduction reduces taxes.  It is a deduction and not a credit; so it reduces taxable income and that reduces the income tax only by a percentage.  It is not a 100% reduction of tax as a credit would be. The amount of actual tax savings will be based on your Federal and State tax brackets, along with several other factors.  So, a $30,000 Section 179 deduction may only reduce your net taxes by only $10,000; not by $30,000.

The other big issue that you need to deal with is the limit on the Section 179 that you can claim based on your business related income. Normal capital gain income does not qualify for the Section 179 purposes, so the gain on your LLC termination can't be offset against new Section 179 unless it also includes business profit and depreciation recapture.

The best thing to do would be to have your personal professional tax advisor run some pro-forma 2008 figures for you based on the real info you have, as well as the different assumptions you want to test in order to get a realistic estimation of any potential tax savings from buying and starting to use new business equipment before the end of 2008.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Yes very helpful.

Thanks a lot.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/20/2008 11:43:00 AM Send this post:

Q:

Subject:  2008 section 179

We have a "C" corporation that has a fiscal year ending September 30th. If we purchase equipment between 10/01/08 and 12/31/08, can we still get the addition 179 expense deduction and bonus depreciation?
 
Regards,

A:

That specific provision is currently based on the calendar year of 2008, so any assets that you do place into service from 10/1/08 through 12/31/08 will qualify for that special bonus depreciation on the 1120 you file for the FYE 9/30/09.

Your professional tax preparer's tax software should pick that up automatically.  I know that my 2007 Lacerte software is automatically claiming the bonus depreciation on any asset that has a 2008 setup date.

There is also the possibility that the provision for the bonus depreciation will be extended for assets placed into service in 2009; but that will be up to our new rulers in 2009.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you very much .

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/20/2008 11:30:00 AM Send this post:

Since it is one of the largest potential deductions available on income tax returns, the Section 179 expensing election generates a lot of email from people who are confused about it.  In the last few months, I have been receiving at least one each day, often from salespeople who are looking for ways to induce their customers to buy more products.  These sales pitches often include a flyer or short article on the benefits of Section 179. 

I am still plowing through a massive backlog of email, and I noticed one yesterday from a scientific equipment company promoting a free online seminar on December 2 presented by a CPA on what they call “Tax Code 179.”   It appears to be open to anyone and aimed more for small business owners than for tax professionals.  It doesn't appear to qualify for CPE for tax pros; but it may still be useful for the newer ones.

I have no connection with any of the parties involved and don’t even know how I go on that particular mailing list.  I am passing it along in the hope that some folks will check it out and not need to send me so many repetitive questions on the issues of Section 179.  You can sign up for this webinar at Gerber Scientific Products’ website:
www.gspinc.com/taxcode179/

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/20/2008 11:20:00 AM Send this post:

Q:

Subject: section 179

Curious, would an atm qualitfy for section 179.  Maybe one can argue that the atm part qualifies but if it is enclosed in a building, it is not.   I presume we would have to have the atm in place and working prior to year end.  We are on cash basis for tax purposes and a S corp.

A:

You should be working with your own personal professional tax advisor on matters like this.

S/he will most likely tell you that the actual ATM machines will qualify for Sec. 179; but structures built to house them do not.

Sec. 179 and depreciation deductions have always required that the asset be actually placed into active service before the end of the tax year, regardless of when you pay for them.

It is also not relevant for Sec. 179 or deprecation purposes how you pay for the machines, cash or via a loan.

Again, your own personal tax pro should be able to give you more specific advice for your particular situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your time

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/05/2008 02:56:00 PM Send this post:

Q:

Hello Kerry,

I work for an accounting software company and I have a question for you regarding Section 179. Our software is not “off the shelf” as we have resellers that customers purchase from. I am no accountant so please be kind and speak in laymen’s terms.

We have customers that initially purchased the software, but did not stay on a plan. They now want to come back on a plan and get all the software that they missed which has new functionality to benefit their business. Some need to update their computer hardware, server, printers, etc. for compatibility issues, and/or add additional user licenses and modules. If they decide to do this, does the software and/or plan fall under Section 179?

Thank you for your assistance.

I hope you're not planning to give tax advice to your customers, because that is extremely dangerous for both you and for them. Sales people giving out tax advice is one of the pet peeves we in the tax profession have long had to deal with; often with bad results if that advice was heeded by a customer without verification with their own professional tax advisors.

The costs for your software, plan and the related hardware should be potentially deductible as either Section 179 or as normal operating expenses, based on the costs involved and the useful life of the software.

If deductibility is a deal breaker for your customers, they should each check with their own professional tax advisors to see how much they will be able to deduct in the first year. There are limits based on taxable income and the total cost of new property purchased during the year; so there is absolutely no way you can be in a position to know what Section 179 deductions they may be able to claim.

Good luck. I hope this helps.

Kerry Kerstetter

Hello Kerry,

I would personally never give out information in a territory I am unfamiliar with. Our Managers here have advised us already not to give out tax advice. This Economic Stimulus is not being used as a "deal breaker" by any means. We have a PDF on the Economic Stimulus (I attached it), but I wanted to find out if this is something worth while for the customer or if I should not even mention it at all. It seems like it is a case-by-case instance and there is no real black or white about it. For now, I'll just have them view the PDF and contact their CPA.

Thank you for your assistance.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/15/2008 01:01:00 PM Send this post:

Q:

Subject: Tax Question

To Whom it May Concern,

Recently my father and I downloaded some material from your website. My father is involved in an appeal with the IRS. He needs some supporting documentation (case histories would be best) in reference to using 179A instead of depreciation for a tractor bought in 1999 then transferred to strictly business use in 2002. Where might we find this type on information. Any help you can offer would be greatly appreciated. Thank you

A:

This is shaping up to be a perfect example of the foolishness of trying to handle tax matters without the assistance of a qualified professional tax advisor.

First is the issue of Section 179 expensing of the tractor.  From your question, I am assuming that your father tried to expense the cost of the tractor on his 2002 1040, when he started using it for farming.  I can't provide any cases to support this position because it is wrong. Only equipment that has been newly acquired from an unrelated party qualifies for the Section 179 election.  Converting a personal use asset to business use does not meet this test because it has been acquired from himself.  Any competent professional tax preparer would have known that.

Next is the issue of handling an IRS audit without professional representation. This is insane and will result in heavy additional taxes, penalties and interest.

Since he is still with Appeals, it is not too late to hire a professional tax advisor to take over the case on his behalf.  Since it is obvious he will be losing the tax break from the Section 179 on the tractor, it is imperative that a tax pro review the entire tax return to see if there are other areas in which legitimate deductions were overlooked.  It is very likely that a competent tax pro will be able to locate enough other missed deductions to more than offset the loss of the Section 179 deduction.

This is all the more crucial due to the tax year being reviewed, 2002. Any additional taxes that are determined to be owed will also be assessed penalties and interest starting from 4/15/03, which will magnify the bottom line amount IRS will be demanding.  When you toss in the comparable State taxes, penalties and interest on the final IRS determination, there could be a substantial amount due.  Risking that in order to save from having to pay a tax pro's fee is ludicrous.

Good luck.  I hope this helps.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/19/2008 09:13:00 AM Send this post:

Q:

Kerry if I finance the tractor will I still. Get same write off.

A:

Both the Section 179 expensing and depreciation deductions have nothing to do with how the new asset is financed.  It is the exact same deduction whether you pay cash or take out a loan.

The only difference will be no interest expense deduction for a cash purchase.

Kerry

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/21/2008 01:48:00 PM Send this post:

It still amazes me that all of the media coverage of the recent tax law focuses on nothing but the tiny rebate checks and ignores the huge increase in the Section 179 deduction that could save small business owners a lot more money than the stupid rebates would provide. 

It was interesting to receive a mass email today from HP with the following subject:

See how the new economic stimulus bill might benefit you!

The top text:

The economic stimulus bill signed into law by President Bush on February 13, 2008 provides some exciting benefits for business!

One provision substantially increases the amount that small businesses can deduct for certain capital equipment expenditures from $128,000 to $250,000.

A second provision allows for bonus depreciation in 2008 on certain capital equipment expenditures purchased this year that would normally be depreciated over many years.

Of course, we recommend you speak with your tax advisor on how these provisions can benefit you directly.

This reminds me of a snail mail letter I received in 1984 from American Motors shortly after our rulers in DC had instituted the luxury car limits on vehicle depreciation.  The letter was addressed to tax professionals, advising us of how much more in tax savings via depreciation and the Investment Tax Credit our clients could have if they were to purchase a Jeep Grand Wagoneer because it weighed over 6,000 pounds, instead of a lighter vehicle. 

I have always thought this kind of angle is a smart marketing approach and have been surprised that more companies didn’t use it.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/10/2008 12:33:00 PM Send this post:

Q:

Subject: section 179

Kerry,
I don't know if you will read or answer this email but here goes with my question.  According to my CPA some
items that I purchsed in '07 will qualify for a section 179 deduction on my taxes.  When I read your blog I got really confused.  Let me explain my situation.

1031 exchanged residential real estate property that is fully depreciated.  Original purchase 1981.
In 2007 I remodeled and purchased ref, stove, dw, new tile & carpet flooring & new kit. countertops.  Cost
aprox $10,000.  Will these purchases qualify for 179?

I am retired and own two residential rental properties one rented 12 mos., the other only seasonal.

Thanks,

A:

The ability to deduct the costs of the new items depends on which schedule you are using to report the income and expenses for the properties.

For residential rental property reported on Schedule E, assets used there are specifically not eligible for Section 179 expensing.

For properties that are rented out for an average of less than seven days at a time, and which are thus reported on Schedule C, movable equipment purchased for those properties are probably eligible for Section 179 expensing, subject to the other limitations on Section 179.  Items that become a permanent part of the structure, such as tiling, flooring and kitchen counters, are not eligible.

Your professional tax advisor should understand the difference between these two types of rental properties and understand which types of equipment qualify for Section 179 and which don't.

Good luck  I hope this helps.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/27/2008 01:16:00 PM Send this post:

Q:

Subject: section 179 limits

Hi Tax Guru:

I have just finished reading the 179 entry on your website. Quick question, as a small business owner, can I purchase a new 6000 lb suv every year to qualify for the $25K deduction?

A:

Of course you can, if you want that many SUVs.  I used to have a client who traded in his car every six months for a brand new one.

As I've discussed numerous times, there are tax consequences to the way in which the old SUV is disposed of; selling vs. trading.

Your personal professional tax advisor can give you more specific info for your unique situation.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2008 02:41:00 PM Send this post:

Q:

Subject: Section 179

My wife is currently are using the standard mileage deduction on a Chevy we transferred into business service 4 years ago.  We are expecting a large tax liability this year and next year my wife is taking off 3 months from her LCC business (she uses schedule C for business income) so we want to take the section 179 depr deduction this year.

If we buy the car on 12-31-07 and put it into service that day, it will be used 100% this year for the business.  The existing vehicle (which will be traded in with a $10,000 trade value) will have about 75% business.  Can I still claim 100% of the 179 deduction on the new SUV?

If next year the business use drops to 75% is there any recapture requirements or does that only effect next years actual cost deduction?

Finally, any problem with using both the standard deduction on the old vehicle for 2007 (it will be taken out of service on 12-28-07) as well as using the 179 deduction for the new car?  The cost of the new car is $45k, with the trade in my cash loan is $35k so I have $10k for deprecation, would I use the 30% or 50% method going forward in future years for the $10k left to deduct using the actual method?

Is the trade still considered like kind even though I changed deprecation methods?

I know this is late in the season, but we are making the purchase, now we have to decide how to handle the tax issues.

Thanks

A:

You really need to be working with a professional tax advisor on matters such as this rater than trying to stumble your way through the tax maze on your own.

Just some quick answers to your main queries.

There is no actual Section 179 or deprecation recapture required in subsequent years unless the business usage percentage drops below 50% or the asset is sold.  If you claim 100% business usage for 2007 and then the business usage drips to 75% in 2008, the 2008 depreciation deduction will most likely be zero, depending on how much of the purchase price you are expensing for 2007.

The numbers you gave are a little confusing.  Basically, the amount eligible for Section 179 expensing is the excess of the new vehicle's purchase price over the trade in allowance you are given.  For example, if the new vehicle is costing $45,000 and the dealer allows you a net of $10,000, the extra $35,000 is available for the Section 179, subject to the various other limits.  If there is a pay-off or assumption of an old loan on the old vehicle, the calculation changes, with a lower amount being available for Section 179.

Any undepreciated cost of the older vehicle would continue to be depreciated over the life of the new vehicle.  Since you have been using the standard mileage method, you will definitely need to have a professional tax advisor do the basis calculations on the old vehicle, the like kind exchange worksheet and form (8824) and the new basis of the replacement vehicle.  Like kind has to do with the vehicle for vehicle and the fact that you are going to be using different deprecation methods for the new vs old one doesn't have any bearing whatsoever.
 
Again, you should be able to see that this can get very messy on your 1040 and you definitely need to be working with a tax pro who can see that everything is reported properly.

Good luck.

Kerry Kerstetter

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2008 11:36:00 AM Send this post:

As I had been predicting, the economic stimulus program from our rulers in DC includes a very generous increase in the maximum Section 179 deduction.  All of the media attention regarding the stimulus bill has been on the tiny rebates and they have overlooked and ignored this very substantial tax break for small businesses. 

Here is how it is explained in the recent Spidell Flash E-mail:

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/08/2008 05:41:00 PM Send this post: