As simple as it seems to calculate depreciation for tax purposes, there are far too many options and variables to consider; such as in this recent exchange I had with a tax pro in Virginia:

One thing you should talk about is the fact that if more than 40% of depreciable purchases are made in the 4th quarter of a tax year, all depreciation of that asset class is subject to the mid-quarter convention, not the half-year.  So long as a taxpayer is 179-expensing everything, this doesn’t matter (with the exception of listed property converted from personal assets).  However, someone hoping to depreciate other pieces of 5-year property using normal GDS tables would face a larger bill.  Not a deal-breaker, just something to throw into the calculation.
 
Ryan Ellis
www.ryanellisassociates.com

I wrote back:

Ryan:

Excellent point, although a little more technical than I usually like to get in this forum, which isn’t intended to replace consultations with tax pros. 

That reminds me of the following email I received a while back from someone with a Federal government (not IRS) email address with the subject of “section179”

if i buy equipment for 400,000 (laser machine) in 04 how much can i depriciate?

My Reply:

Such an answer is impossible to give.  There are too many variables to consider before being able to calculate the Section 179 and depreciation deductions on such a purchase; such as what your taxable income is, how much you have spent on new equipment for the year, as well as when in the year the item was purchased. 

Your personal tax advisor can work out more precise figures for you.  If you aren’t working with a tax pro, and you’re ready to plunk down that much money for one machine, all I can say is I wish you lots of luck.

Thanks for writing Ryan, and I hope your tax season goes smoothly.

Kerry Kerstetter

Q:

My accountant told me that as a C-Corp in the state of California, I do not qualify for the IRS code 179 immediate deduction of up to $100,000 and that I need to depreciate assets I buy this year (i.e. office furniture, computers, etc.).  He also said that in California S-Corps do qualify for the 179 deduction but C-Corps don’t which makes no sense to me.  Is he correct?  I hope not…….personally, I would rather deduct the whole amount and reduce my tax burden.

A:

What your accountant is referring to is the fact that California tax law – for California income tax returns – does not match Federal tax law in regard to the Section 179 deduction. Similar differences exist in many other states as well.

A C corp does qualify for the up to $102,000 of Section 179 deduction on the Federal 1120.  However, there is no Section 179 expensing allowed for C corporations on the California 100.  Those assets would have to be depreciated normally.

On individual income tax returns, the Federal law allows up to $102,000 of Section 179 deduction on the 1040.  On the California 540, the annual maximum is only $25,000.  Anything above that would need to be depreciated normally.

Since S corps don’t pay income tax, and their income and expenses are passed through to their shareholders via the K-1s, it is true that some of the of cost business equipment purchased by an S corp may be able to be deducted as Section 179 expense on the shareholders’ 1040s and 540s with the same maximums as I mentioned above.

The real downside to this disparity between the Federal and State rules is that you need to keep two sets of depreciation schedules.  When assets are sold, the gain or loss will be different on the Federal and State tax returns.

Over time, you will still be able to claim the same over all cost for business assets on the Federal and State returns.  The difference is in the timing.  It would be nice if there were more consistency; but that isn’t always possible.

I hope this clarifies the situation for you.

Good luck.

Kerry Kerstetter