Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Employees Can Claim Section 179 Deductions

Posted by taxguru on July 17, 2004

Another good  question about the lucrative Section 179 expensing election. 

 

Dear Tax Guru, 

I am contemplating the purchase of a new vehicle.  I am a sales person employed by a corporation that provides a car allowance and some reimbursement for fuel.  The requirement of the company is to have a late model vehicle in good condition.  Since I am an employee and not a small business owner, would I still qualify for the deduction allowed for vehicles over 6000 pounds since I have to provide my own vehicle for business purposes? 

Thanks,

My Reply:

That is a common misconception; that only business owners qualify to deduct the purchase of business equipment.

Fortunately, IRS regulations define active trade or business income to include the trade or business of being an employee. This allows the use of Section 179 expenses to somewhat offset wages, tips and other income received as an employee.

The big difference between claiming the Sec. 179 for a self employed (SE) person and a W-2 employee is the effect on the person’s AGI (adjusted gross income). SE individuals claim it on their Schedule C and it reduces their AGI.  W-2 employees have to claim it on Form 2106, which flows to the Miscellaneous Deductions section of their Schedule A.  This does reduce their taxable income, but not AGI. 

There is also the issue of having to reduce the Misc. Deductions by two percent of AGI.

I have also found a number of cases where high Misc. Deductions trigger the infamous AMT (alternative minimum tax).

Another difference is that Section 179 expenses will reduce a Schedule C proprietor’s 15.3% self employment tax; but it won’t reduce a W-2 employee’s FICA or Medicare taxes at all.

So, bottom line, you can claim Section 179 for business equipment, including vehicles, that you use as a W-2 employee; but it won’t save you as much in taxes as it does for a self employed person.

I hope this helps.  Your personal tax advisor can better explain exactly how much you will be eligible to deduct because there is also an overall limit based on your income for the year.

Good luck.

Kerry Kerstetter

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