Q-1:

Subject: Section 179 expensing

 

Mr. Kerstetter,

 

I am writing to see if you may be able to help me with my confused state.  In 2004 I purchased an airplane with the plan of placing it into service at a local airport as a rental for student pilots.  I was advised, by my accountant, to form an S Corp and purchase the airplane.  I placed the airplane into service in the 1^st quarter of 2005 and kept it in service during all 4 quarters.  As it turns out it was not a profitable venture and I was negative approximately $15,000 (Profit/loss).  I had planned on taking a 179 expense however due to the business income limitation I cannot take the expense however I can carry it over to 2006.  As an aside a business venture such as this has no hope of ever being significantly profitable.

 

My question is would I be in the same situation if I had set up my company as an LLC?  As an LLC entity would my ordinary income be included in the business income limitation?  Is the business income limitation handled a little differently from an S Corp and a LLC?  Is there anything I can do to remedy this situation?

 

Thank you in advance for your assistance.

A-1:

Multi-member LLCs are treated essentially the same as S corps tax-wise, including with Section 179.

If you had set up a single member LLC and elected to treat it as a Schedule C sole proprietorship for tax purposes, the Section 179  expense would have been matched up against all of the earned income on your 1040, including from W-2s, most likely increasing the actual usable deduction.

Did you go over these different options with your accountant beforehand, or was he the kind who believes in a “one size fits all” S corp for everyone approach, without adequately analyzing the various factors first?

Kerry Kerstetter

Q-2:

I guess my accountant was the “one size fits all mentality.”  I thought I was doing the right thing by going to him BEFORE I set up any business entity and even told him specifically (in 2004) I wanted to be able to take advantage of section 179.  I also spoke with an “aviation specialist” tax attorney who also recommended incorporation as an S Corp.

Without the 179 expense I owe $14,500 in Federal taxes, if I could (magically) be able to take advantage of the 179 expense I would have a $25,000 refund.

I have filed an extension and not have filed any returns as yet.  Do I have any options?

Best regards,

A-2:

With no income expected, it does seem rather careless to use an S corp if your goal was to maximize the Sec. 179 deduction.

What I have seen in cases just like this that I have worked on is that it often comes out okay by forgoing the Sec. 179 and just claiming normal or accelerated depreciation, which can be used to create a net loss that can flow through to your 1040 via the K-1.  If your preparer enters for Sec. 179 in his tax prep program, that will create a carry-forward for that amount and reduce the depreciable basis, resulting in much lower depreciation deduction.  While you won’t get the huge Sec. 179 deduction all in one year, you will still get large losses for the depreciable life of the plane.

Good luck.

Kerry

Q-3:

Kerry,

 

Thank you. I am not sure careless is a strong enough word, as I said I was specific with my accountant that I wished to take advantage of the 179 expense.  Since the business was not profitable I “retired” the aircraft from service.  At present I am only looking at a deduction for 2005.

 

I will also be looking for a new accountant.  Can you make any referrals in the Denver area?

 

Again, thank you for your assistance.

 

Best regards,

Q-4:

Unfortunately, we don’t have anyone to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.:

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

 

This has been an expensive lesson for me.  My accountant has become a friend and I hope to keep him as a friend but he has proven to me that he can no longer be my accountant.  This misstep in tax planning impacted a commercial investment which hinged on the tax savings from the 179 expense; a plan I have discussed in detail with my accountant.

 

I would like to thank you again for you kind and thoughtful advice.  I can’t tell you how much I appreciate it.  I have lost some sleep over my situation

but I realize I have many other blessings in my life and I am thankful for them.

Best regards,