Q:

Subject: Section 179-Are assets used in commercial rentals eligible for the Section 179 deduction?

 

Good Afternoon TaxGuru,

 

TurboTax allows me to take a Section 179 deduction for tangible, personal-property assets used in my commercial rental activity.  It does not allow this treatment for residential rentals. 

 

Here’s my problem.  I can’t find anything in Publication 946 to support TurboTax’s position, but find it difficult to believe that this huge company could make such an error.

 

My accountant says I can’t take the Section 179 deduction; TurboTax says I can.  Would you please steer me to the relevant IRS regulations and rulings? 

Perhaps you could add it to your online article about the Section 179.

 

Thank you kindly.

A:

You are approaching this bit of research into the Section 179 law from the wrong perspective if you expect it to specifically spell out every single possible type of asset that would qualify for first year expensing.  That isn’t how most laws are written.

It’s been almost 35 years since I took Business Law in college, so I don’t remember the specific legal term; but I do recall the concept that most laws allow certain things in a broad sense and any exclusions from that coverage are required to be specifically stated. In other words, if a law says movable business equipment can be expensed in the first year, we start from the premise that this includes everything.  Then, the law and regulations specify certain things that are not to be covered by this law.

As you have most likely already seen, most descriptions of ineligible property include the following:
   “Used predominantly to furnish lodging or in connection with the furnishing of lodging (with the exception of hotel/motel operations).”

If the law were intended to rule out property used in any kind of rental activity, it would say so and not make the very definite distinction of only mentioning lodging (aka residential).  By only mentioning that kind of rental activity, it allows us to operate under the assumption that otherwise eligible property used in any other kind of rental activity would not be ineligible.

There is also the fact that, for as long as the Section 179 deduction has been in existence, landlords of commercial properties have been claiming it for many kinds of equipment used in conjunction with those rentals and IRS has not had any problems.  Many of my clients are commercial landlords and I frequently use Section 179 on those rental schedules, and IRS has never once disallowed it.

I realize this may not be as detailed an answer as you were hoping for; but it’s the best I can come up with during this heavy crunch time.

I hope it helped you understand this issue a little better.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry:

 

Thank you for your excellent advice.  You  answered my question and taught me an entirely-new-way-of thinking.

 

This is an incredible gift.  I will revisit your site regularly to check out your advice and watch for client openings.

 

Thanks again.

 

Your raving fan,

Q:

Subject: Section 179 truck depreciation question

Dear Kerry,
  I have a tax question I’m hoping you can help me with.
     We bought a truck in 2006 for our business and are going to section 179 depreciate it’s value for the next 5 years. If I deduct $5000 (depreciate) it’s value this year, can I deduct more next year, (in the event we make more money and I need more deductions.)
    Is the depreciation set once you place something in service? Is there anyway I can increase the amount on the second or third year?
        The truck cost 22,000 dollars, so it’s be nice to depreciate it just enough each year so as to not have to pay taxes. So maybe $5000 this year, and $6000 the next, but maybe only $3000 the third year. Is this possible?
         Please let me know ASAP as taxes are due soon.
                     Thank You,

A:

You can’t just change the depreciation methods and amounts each year.  There has to be a consistency.

That said, there are a number of ways in which you can depreciate the truck.  For example, you can use straight line or accelerated regular depreciation.  You can claim part or possibly all of the cost of the truck as Section 179.  If your taxable earned income rules out an actual current year full deduction, the excess Sec 179 can be carried over to be used on the 2007 4562, and so on.

You really need to be working with an experienced tax professional because it is obvious that you are guaranteed to make mistakes that could cost you tax dollars, as well as get you into trouble with IRS. Handling the tax matters on your own is absolutely crazy.

In regard to the tax returns deadline, you are not likely to find a good tax pro in the next two weeks because we are all already swamped.  You should do your best guesstimate of how much you will owe with the 2006 tax returns and send that in with an automatic four month extension in order to give yourself adequate time to locate and start working with a tax pro. 

Good luck.

Kerry Kerstetter