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

Q:

Hi Tax Guru,

I was researching buying an suv for our business and ran into your column.
My husband and his brother (partnership) opened up a business in the mall (food court) on November 2, 2004 and it is doing fairly well. I was wondering if we should go ahead and buy an suv this year by Dec 31, 2004 to get the 179 deduction or should we wait until January 2005 to purchase our vehicle since we’ve only been in business for 2 months. I know that the deduction for a vehicle changed from up to 100k to 25k but I am not sure what that means since we’ve only been in business a short period of time. I also have a full time job not related to the business. Thanks for your advice.

Sincerely,

A:

As I always advise, it’s never a good idea to spend money just for the tax break, especially on something as expensive as an SUV.  However, since you seem to have already decided on getting one, the other standard advice kicks in.  A deduction on your 2004 tax return (by buying the SUV and placing it into service by 12/31/04) is worth more in the time value of money than the same deduction on your 2005 tax return. 

If your SUV is going to be purchased as a brand new vehicle costing more than $25,000, this decision is even more lopsided this year.  As I’ve already discussed in a number of postings on my blog, the 50% bonus depreciation deduction will expire as of 12/31/04.

The Section 179 deduction is not based on how long the business was in existence.  A business that has been operating two months of the year is entitled to the same $102,000 maximum Section 179 deduction as a business that was active for the full twelve months.

There is a limit on the amount of Section 179 that can be claimed on a tax return based on your taxable income for the year.  However, this calculation isn’t limited to the income generated by the specific business that will be using the new Sec. 179 equipment.  If you have other income, such as from W-2s, the Sec. 179 can be used to offset that.

There could be a difference in the allowable Sec. 179 deduction depending on how the new SUV is purchased.  If the partnership buys it, the taxable income limit will be calculated at the 1065 level, which could mean that nothing is allowed if the partnership already has an operating loss.

If you buy it in your personal name and show it on your 1040, you will be able to use other income, such as W-2s to qualify for a higher Sec. 179 deduction. 

You really should be working directly with a tax pro who can work with your actual figures and circumstances to help you come up with the best game plan.

I hope this helps.  Good luck.

Kerry Kerstetter