Tax Guru – Ker$tetter Letter

Q:

Subject: Disposal of 179 asset

Kerry,  I used 179 deduction in 2005 to purchase an RV that I use for business purposes.  I plan on “upgrading” to a larger RV and trade the original one in on the new one.  What are the tax implications?  Will I be able to take an additional 179 deduction on the new RV?  The old RV cost $103,000 and I should be able to trade it in for about $75,000.  The new RV list price is $225,000.  I file a schedule C and have other income from other sources ($450,000) other than the Schedule C income.  Thanks for your help and I love your Blogs.

A:

I have discussed this very topic in a number of previous blog posts, so I will only give the quick and simple answer.

Only the new investment in business equipment would be eligible for the Section 179 deduction.  In your case, that would be the additional $150,000 ($225,000- $75,000) that you would be paying for the new RV, assuming it is going to be used 100% for your  business.  How much you can actually deduct will be subject to the various other limits, such as applicable earned income and total investments in Section 179 property for the year.

If you’ve been reading my blog for long, you should be able to anticipate my biggest concern in your situation.  Why are you asking a stranger on the net for this kind of advice instead of your own personal professional tax advisor?  That is very scary and frankly reckless for someone earning $450,000 per year. 

You need to start working with a tax pro ASAP and before you buy the new RV because there are some very simple tricks that can be used to allow you to very easily double the amount of your Section 179 deduction from the current maximum of $125,000 for 2007 to $250,000 by using a C corp to acquire some of the new business equipment.  If you’re running all of your income through a single 1040, you are grossly overpaying your taxes.

Good luck. I hope this helps.

Kerry Kerstetter