This is from early August (I said I was far behind in my postings).

Q:

I am starting a home business selling Herbalife nutritional supplements. I am a sole proprietor , but they send me a 1099 at the end of the year. Can I purchase a used minivan and a laptop for my business and then claim the whole amount on my taxes using the form 4562 section 179?

Can my name and my husband’s name be on the title of the minivan, if he is not a partner on the retail merchant certificate ? Or does the title have to have the Doing Business name on it?

This is all new to me. I hope to hear from you soon. Thanks again

A:

How the assets are titled doesn’t matter for tax deduction purposes. What matters is how they are used. You can deduct the cost of business equipment based on its percentage used for your business. For computers, it’s based on time used. For vehicles, it’s based on miles driven.

If the van weighs more than 6,000 pounds and is used more than 50% for business, it is eligible for the Section 179 immediate expensing election for the business portion. If it weighs less than 6,000 pounds, you have to depreciate it over five years.

You really should be using the services of a tax pro to make sure you do everything properly. Most tax pros who understand small business will save you many times more in taxes than their fee.

Good luck.

Kerry Kerstetter

It looks like the new law restricting the Section 179 deduction for vehicles weighing less than 14,000 pounds will be signed into reality this week.

Just a reminder that one way to double the allowable amount is still by using a C corporation.

From early September:



Q:

I have a sno cone trailer and equipment (about $10K in capital) that has been down two years out of three I have been depreciating (because the truck I was using died on me). This is a seasonal business, about 6 months of year (I do events in Texas).

Now I see this Section 179 thing and am wondering if I can buy a truck at end of year (2004) and take the deduction in 2004 for the entire thing ($30K). I will be able to get the business going again in March 2005.

A:

The Section 179 expensing election has been around for several years; but it’s just recently been increased to the current level of $100,000+ per year.

One key requirement that has always been part of Section 179 is that the asset must actually be placed into service during the year for which you are claiming the deduction. In other words, you can’t buy the new truck and claim any depreciation or Sec. 179 on your 2004 tax return if you don’t actually start using it in your business until 2005.

What you may want to consider doing is reactivating your business before the end of this December and use the new truck to run business related errands, such as buying supplies.

I hope this helps. You should obviously consult with your own personal tax advisor for the best customized strategies for your case.

Kerry Kerstetter

Q:

Dear Guru,

We had a good year in the business, and with no other equally plain and speedy remedy, have utilized the section 179 business equipment section to shed some excess income. We have purchased a good, but big, vehicle for business use. It burns a bunch of gasoline, and though it is a perfectly good vehicle in all other respects (Lexus), it is not at all fuel efficient. How long do we have to keep this vehicle? Does the IRS care?

A:

If you have a profitable business, you really should have a personal tax pro who can advise you.

In regard to disposing of your gas guzzler, the issue isn’t how long you own it. If you deducted its full cost under Section 179, it now has an adjusted cost basis (aka book value) of zero. Whatever you sell it for, at any time, anything you receive for it will be taxed as ordinary income as depreciation recapture.

There is a way around this. If you trade the vehicle in on a new one valued at least as much as this one is worth, and don’t receive any money back, you can roll the gain over into the new replacement vehicle. This would be a Section 1031 tax deferred like kind exchange, reported on Form 8824.

Good luck.

Kerry Kerstetter

Q:

I heard that the section 179 maximum was being lowered right now by vote in Congress. Is that true and if so, how much?

Thanks,

A:

The overall limit of $102,000 for the Section 179 deduction isn’t being changed.

What is looking like a possible change is the amount of that $102,000 that can be used for vehicles weighing between 6,000 and 14,000 pounds. That would be capped at $25,000 per year if this current bill makes it into law.

The remaining $77,000 would be available for other kinds of business equipment, including vehicles weighing more than 14,000 pounds.

Stay tuned to TaxGuru.net for the latest on this topic.

Kerry Kerstetter

I’m cleaning out my “To-Post” box of questions regarding the Section 179 expensing election, since the proposed change in the amount allowable for vehicles has attracted so much attention in the past week.

From a reader:

I am a partner in a LLC – does the automobile need to be titled in the LLC’s name or in my name. Thanks

My reply:

It depends on where you want to claim the Section 179 deduction.

If you are claiming it on the 1065 for the LLC, where it will be divided among all of the members via their K-1s, the vehicle needs to be in the LLC’s name.

If you own it personally and use it for LLC work, you can claim it on your 1040 based on the percentage of miles driven for that business. This will give the full deduction to you and it won’t be shared with the other LLC members.

I hope this helps. Your personal tax advisor can be more specific for your situation.

Kerry Kerstetter

This Q&A from about a month ago would be a little different if the pending law goes into effect limiting the Section 179 deduction for vehicles between 6,000 and 14,000 pounds to just $25,000 per year.

For anyone who hasn’t picked up on it, I am dead set against this new limitation – not because I’m a fan of buying big vehicles just for their tax benefits (I am not) – but because it is unnecessary meddling by our DC rulers into the operations of small businesses. If small businesses are allowed to expense up to $102,000 of new business equipment per year, the owners should be able to decide how to allocate that amount. If they choose to blow most of it on big trucks and SUVs rather than other kinds of machinery and equipment, that should be their right. I know I’m being an idealistic capitalist here, in wishing for our rulers to stop trying to micro-manage our business decisions.

A reader asked:

Thanks in Advance for the advice.

In 2002 I put a vehicle into service and took the 24k first year deduction. I am interested in trading it in for a newer vehicle that would also qualify. Can you tell me how that is interpreted? Do I have to recapture my deduction?

Here are basics

2002 purchase $36,000

2002 deduction $24,000

2003 deduction $ 3,000

Value is approximately $23,000 now, but I have depreciated it to $9,000 (is that correct?)

Does this mean if I get rid of it now I would have to claim a $14,000 gain?

And if so, assuming I purchased something for $50,000 that would qualify for sec 179 would my first year write off be $36,000.

Thanks so much.

My response:

There is a difference between whether you trade your old vehicle in or sell it in a separate transaction.

Assuming a half-year’s depreciation ($1,500) for 2004, your book value of the old vehicle would be $7,500. If you sell it for $23,000, you will have taxable depreciation recapture of $15,500.

If you were to trade in the old vehicle towards the new one, there will not be any gain or depreciation recapture to worry about. Assuming the vehicle is over 6,000 pounds and is to be used 100% for business, you will be able to claim the Section 179 deduction for the additional amount paid for the vehicle on

top of the trade-in value. In your example, that would be $27,000 (50 – 23).

If you were to sell the old vehicle and buy a new one for $50,000, you would have the $15,500 of depreciation recapture gain; but you could claim the full $50,000 as Section 179 on your Federal tax return. While at first look, this might seem like a better deal than a trade, there are some issues to consider.

First is the maximum Section 179 deduction. While the Federal limit of $102,000 is more than most people need, many states haven’t conformed to that higher limit and are still using the old limits of around $24,000 per year.

Another issue is that if you bought a lot of new business equipment, this option would only leave $52,000 of Section 179 for other items. The trade-in approach would leave $75,000 (102 – 27) available to be used on other items.

I hope this helps you work out your game plan. As always, I strongly advise working with a tax pro who can crunch your actual numbers and tailor a strategy that’s best for your situation.

Good luck.

Kerry Kerstetter