Q:

Subject: Section 179

My wife is currently are using the standard mileage deduction on a Chevy we transferred into business service 4 years ago.  We are expecting a large tax liability this year and next year my wife is taking off 3 months from her LCC business (she uses schedule C for business income) so we want to take the section 179 depr deduction this year.

If we buy the car on 12-31-07 and put it into service that day, it will be used 100% this year for the business.  The existing vehicle (which will be traded in with a $10,000 trade value) will have about 75% business.  Can I still claim 100% of the 179 deduction on the new SUV?

If next year the business use drops to 75% is there any recapture requirements or does that only effect next years actual cost deduction?

Finally, any problem with using both the standard deduction on the old vehicle for 2007 (it will be taken out of service on 12-28-07) as well as using the 179 deduction for the new car?  The cost of the new car is $45k, with the trade in my cash loan is $35k so I have $10k for deprecation, would I use the 30% or 50% method going forward in future years for the $10k left to deduct using the actual method?

Is the trade still considered like kind even though I changed deprecation methods?

I know this is late in the season, but we are making the purchase, now we have to decide how to handle the tax issues.

Thanks

A:

You really need to be working with a professional tax advisor on matters such as this rater than trying to stumble your way through the tax maze on your own.

Just some quick answers to your main queries.

There is no actual Section 179 or deprecation recapture required in subsequent years unless the business usage percentage drops below 50% or the asset is sold.  If you claim 100% business usage for 2007 and then the business usage drips to 75% in 2008, the 2008 depreciation deduction will most likely be zero, depending on how much of the purchase price you are expensing for 2007.

The numbers you gave are a little confusing.  Basically, the amount eligible for Section 179 expensing is the excess of the new vehicle’s purchase price over the trade in allowance you are given.  For example, if the new vehicle is costing $45,000 and the dealer allows you a net of $10,000, the extra $35,000 is available for the Section 179, subject to the various other limits.  If there is a pay-off or assumption of an old loan on the old vehicle, the calculation changes, with a lower amount being available for Section 179.

Any undepreciated cost of the older vehicle would continue to be depreciated over the life of the new vehicle.  Since you have been using the standard mileage method, you will definitely need to have a professional tax advisor do the basis calculations on the old vehicle, the like kind exchange worksheet and form (8824) and the new basis of the replacement vehicle.  Like kind has to do with the vehicle for vehicle and the fact that you are going to be using different deprecation methods for the new vs old one doesn’t have any bearing whatsoever.
 
Again, you should be able to see that this can get very messy on your 1040 and you definitely need to be working with a tax pro who can see that everything is reported properly.

Good luck.

Kerry Kerstetter