Q:

I appreciate your web site. I am trying to complete a homework assignment and have found your web site a great help for my income tax class.

This is my problem,

Lori, who is single, purchased a copier (5-yr class property) for $31,000 and furniture (7-yr class property) for $42,000 on May 20, 2003. Lori expects the taxable income derived from her business (without regard to the amount expensed under sec 179 to be about $100,000. Lori wants to elect immediate sec 179 expensing, but she doesn’t know which asset she should expense under sec 179.

a.) determine Lori’s total deduction if the sec 179 expense is taken with respect to the copier.

b.) determine Lori’s total deduction if the sec 179 expense is taken with respect to the furniture.

c.) What is your advice to Lori?

This assumes that sec 179 is at $25,000 not the increased $100,000.

According to your site, there is a limit of one maximum. Does that mean Lori can claim either the copier or the furniture and not both even if the cost for both were below the maximum?

I would appreciate your help if you have time.

Thanks,

As a rule, I don’t answer homework questions.  However, you mentioned something that has me concerned that others may also be misunderstanding the rules for claiming the Section 179 expensing deduction.

I’m not sure where you are getting the idea that it can only be claimed on one asset per year per tax return.  That is not the case at all.  In fact, I often prepare tax returns where the Section 179 section of Form 4562 says “See Attached Schedule” and several different items are listed on a backup schedule.

Whatever the limit is for the year ($25,000 or $100,000), it can be used to cover the cost of dozens of individual assets for the year.

It is also not an “all or nothing” application.  As an election, you have the right to claim nothing under Section 179 for the year, or perhaps only part of the total that can potentially be claimed. 

You also have the option of dividing the allowable deduction among the different assets acquired during the year.  For example, you could claim $10,000 against the copier and $15,000 against the furniture.  You would then depreciate the remaining cost basis of each asset over its useful life. 

Normally, if maximum deductions are the goal, when one asset has a longer class life than another (such as seven vs. five years), it makes more sense to use Sec. 179 on the asset with the longer life.

I hope this clears things up for you.  Good luck in your class.

Kerry Kerstetter

Proving once again how tax laws are so wide open to different interpretations, I received the following from a 1031 exchanger on the Left Coast in response to my earlier posting on this topic.

Hi, saw your post in the blog re the change in the new tax bill that just went into effect, disallowing the capital gains exclusion for sale of a personal residence within 5 years of its acquisition via 1031 exchange.  I am wondering how you interpret the language “…sales or exchanges after…” the effective date of the act.  Why mention exchanges?  Are they trying to say that if the exchange took place prior to the effective date, this doesn’t apply?  If the intent is to make it apply immediately to all such sales, regardless of when the 1031 exchange took place, why mention “exchanges” at all in this phrase?

Regards,

My reply:

I have to agree with the FEA‘s interpretation of this provision (which I will forward to you) that it would apply to any residence disposition after the 10/22/04 enactment date of the new law.  My guess is that the law mentions “sales or exchanges” in relation to the disposal of a residence in order to include non-cash transactions, such as someone swapping a residence for another property.  Such a deal would be considered a taxable event based on the fair market value of the other property received and would not be eligible for the Sec. 121 exclusion, even if the original property was acquired prior to 10/22/04.

It would obviously be nice if properties acquired prior to 10/22/04 could be grandfathered in and allowed to use the tax free exclusion; but I have never seen any language allowing that to happen.

I hope this helps. 

Kerry Kerstetter