Tax Guru – Ker$tetter Letter

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Section 179 For Recording Equipment?

Posted by taxguru on July 19, 2007

Q:

Subject: Sect 179 Question

Kerry,

 

I found your website while Googling the topic of Sect 179 first-year deductions.  I would like to ask your opinion about a specific piece of electronic equipment and it’s eligibility for first year deduction as opposed to depreciation.

 

I am a self-employed Human Resource Training & Development Consultant.  My business is an LLC and I report income via K-1.  I have recently purchased a 16-track (portable) digital recording studio, along with several peripherials (external CD-R / headphones / condensor microphone / mic stand / mic cable), all totaling about $800.  The intent of this purchase is to be able to record some of my training session content to CD for the purpose of what trainers often call “back of the room” sales – CD’s available for sale on-site to participants in my training sessions, or perhaps available for purchase through my website.

 

Under this scenario, I believe all of these items are deductable under the provisions of Sect 179 for first-year full cost deduction.  I would like to know if you concur?

 

Thanks in advance for any reply you may be kind enough to offer.

Thanks and have a GREAT day!

 
More Info Requested:

I need more info on your situation in order to answer your question.

You said the business uses K-1s.  Is it a 1065 or 1120S?

How many owners of your business?

Did you buy the equipment through the business or personally?

What has your personal professional tax advisor said about this?

Kerry Kerstetter

 
More Details:

Sorry for not being more specific, Kerry.  The busniess is owned by my wife and I with no additional partners.  We do report income using 1065’s.  The equipment was purchased with business funds directly – not personal funds with reimbursement through business funds.  My wife is also our accountant (she has an accounting degree but is not a CPA).  She is very knowledgable about busniess tax issues but is a bit hesitant to fully expense these items for the 2007 tax year as opposed to depreciating them over some reasonable life span.  I believe they qualify for full cost purchase year deduction.  Thanks again for your reply.

Thanks and have a GREAT day!

A:

Thanks for the additional info.  I was worried that you may have been trying to use a 1065 for a single member LLC, which is not legal to do.  It’s fine with a multi-member LLC.

I don’t see any reason why the equipment wouldn’t qualify for the Section 179 expensing election.  However, whether you can actually claim any deduction is a different issue. I forgot to ask whether the LLC is profitable or not, but that factor will decide whether any 179 will be allowable for the year.  As you can see on my web page explaining the Section 179 deduction, there has to be enough net income from the business before that expense in order to be able to claim it.  In other words, the Section 179 deduction cannot add to or create a net loss.  If this income limitation will disallow the Section 179, you may very well be better off just claiming the normal depreciation expense, which can add to or create a net loss.

This is the kind of thing that you should have consulted with a professional tax advisor prior to the purchase rather than after.  If you had purchased the equipment in your individual name instead of the LLC’s, there is a much greater possibility that you would be entitled to a larger net Section 179 deduction because the taxable income test at that level will include other sources of earned income, such as W-2s and other Schedule C income.

I mean no offense to your wife, but even with her accounting knowledge, you need to have a working relationship with a professional tax advisor who can fill in the gaps.  Over the years, I have had several clients who were CPAs and professional accountants who paid me to give advice, review their work and even to prepare their tax returns because they were aware of their own limitations.  A similar relationship would be helpful for you and your wife to establish with a professional tax advisor, who could very easily have gone over the pros and cons of buying the new equipment in your personal name versus the LLC’s name.  Similar issues will definitely be popping up all the time, so the sooner you start working with a tax pro, the better prepared you will be.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thanks again for your replies.  All good advice and very understandable. 

Thanks and have a GREAT day!

 

 

 

 

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