Tax Guru – Ker$tetter Letter

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Archive for October 20th, 2006

Confusion Over Section 179

Posted by taxguru on October 20, 2006

 

Q:

Subject: quick question 

 Kerry,

Hi there- it was great to find your site.   I have a quick question on the Section 179 deduction – and please forgive my lack of expertise in the tax law: say you spend $100K on equipment – does that mean that you totally deduct that amount, saving ~$40K (assuming 40% tax rate?).  Does the ~$400K limit mean that you can save only up to approximately 40%*$400K = $160K in taxes?  How do you quantify what you spend on all Section 179 eligible items  – just adding them up?  It seems weird to me that the fed would actually penalize a company for making >$400K in capital expenditures that would fit the Section 179 law.

Also, can you claim this tax on money spent on upkeep and maintenance on equipment?

Thanks for listening~

A:

While using a taxpayer’s tax bracket percentage as a guide can give you a quick & dirty idea of the tax savings from a deduction, such as Section 179, the actual savings will be different because of the sneaky way in which taxes are actually calculated, such as using AGI as a trigger to reduce or eliminate several tax credits and deductions.  Any item that reduces AGI will have more of a tax saving impact than just the tax rate percentage.

You are misinterpreting the $400,000 issue ($430,000 for 2006).  What the tax code does is phase out and eliminate the Section 179 deduction for any taxpayer that has acquired a huge amount of new qualifying business equipment.  This is intended to eliminate this tax break for what our rulers consider un-deserving “evil big businesses” and focus this special deduction on smaller companies.  However, any company acquiring that much new stuff will still be claiming a substantial normal depreciation deduction, especially if it chooses to use an accelerated method of calculating it.

In regard to qualifying the amount spent on new qualifying equipment, any business that intends to do so must have a good set of accounting records and can run reports of the new items posted to the equipment fixed asset accounts. 

Costs posted to expense accounts, such as repairs and maintenance don’t qualify for the Section 179.  However, since you are already deducting those costs as normal operating expenses, it ends up working out better that way.

I hope this helps you better understand this issue.  If you personally are involved in running a business that may be considering utilizing it, you should be working directly with a professional tax advisor who will be able to better illustrate how it will affect your unique situation.

Kerry Kerstetter

 

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