Q:

Kerry,
Thank you for your answers. One more question.  Once equipment is purchased and the Section 179 full deduction is taken, is their ever a point in time where the owner could sell the equipment, not have to recapture the amount depreciated and pay taxes on the transaction?  I was told that if I took the deduction and held the equipment for five years, I could avoid the recapture tax, even though I sell the equipment five years later for the value I paid for it.

A:

You were either given incorrect information or are interpreting it improperly.

There is a potential recapture on Section 179 property if its business use percentage falls below 50% before the end of its normal MACRS recovery period (i.e. 5 or 7 years). 

However, if an asset’s cost has been deducted on your tax return through Section 179 and/or regular depreciation, and fully depreciated, its cost basis on your books is zero.  If you ever sell that item before you die, anything you get for it will be taxable income.  Whatever you receive for it, up to its original cost, will be recapture of Sec. 179 and depreciation and subject to its 25% Federal income tax rate, plus any applicable State tax.

If you give a fully depreciated item to someone else, your cost basis carries over to that person.  If s/he sells it, anything received will be taxable income and taxed as depreciation recapture.

As I mentioned in my earlier response, the only way to not have taxable income on the item’s sale is if you leave it to your heirs as part of your estate.  Even though it had been fully depreciated on your personal books, its cost basis is stepped up to its fair market value.  If your heirs sell it for that amount or less, it will be tax free to them.

I hope this clears this matter up for you.  As always, it is crucial that you work with a professional tax advisor when considering real life transactions such as these.

Kerry Kerstetter

This topic seems to generate a lot of questions, in spite of being one of the least complicated tax matters.

Q:

Kerry,
Can a C Corp take the full section 179 deduction and the individual take the full deduction on his 1040 as well?
For Estate Tax Purposes, If I purchase an asset and use the 179 deduction, would the value of the asset be zero in my estate?
Thank you

A:

That is one of the big benefits of using a C corp instead of an S, as I have long described on my website.

The same assets obviously can’t be claimed on both the 1120 and 1040; but if new business equipment purchases are split between the corp name and your personal name, it is possible to claim as much as $204,000 per year in Section 179 deductions.

When somebody passes away, the values used for estate tax purposes are the fair market values of those items as of the date of their passing.  The cost basis that the decedent had before passing away is irrelevant. 

An item, such as a vehicle could have a book value for the decedent of zero (fully depreciated), yet have an estate value of much more.   This stepped up basis rule is what many of us call the ultimate escape from taxes, especially in regard to assets like rental real estate.  I have seen several cases where heirs have been able to start claiming nice size depreciation deductions on property that had already been essentially fully depreciated by the previous owners.

Kerry Kerstetter

Q:

I read about the section 179 on your web posting.  I have a question and wonder if you can clarify this for me.

I own 100 percent of an S corp, california.

I purchased two new SUV’s, each of which is over 6K lbs.  They were each approximately 50,000.  Since I purchased these in June of 2004 do I qualify for all of the $100K purchase for this tax year, or was the October revision to this bill allowing only 25K for each auto retroactive to the include autos purchased “pre-october 22, 2004”?

Thanks for your help.

A:

Any SUV purchased before 10/22/04 is not subject to the new $25,000 Sec. 179 limit; so it looks like you lucked out by buying yours before that date.  Of course, you have to have actually used them for business before October 22, not just purchased them, in order to be eligible for the Sec. 179 deduction.

Kerry Kerstetter