Q:

Subject: section 179 limits

Hi Tax Guru:

I have just finished reading the 179 entry on your website. Quick question, as a small business owner, can I purchase a new 6000 lb suv every year to qualify for the $25K deduction?

A:

Of course you can, if you want that many SUVs.  I used to have a client who traded in his car every six months for a brand new one.

As I’ve discussed numerous times, there are tax consequences to the way in which the old SUV is disposed of; selling vs. trading.

Your personal professional tax advisor can give you more specific info for your unique situation.

Good luck.

Kerry Kerstetter

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

 

 

Courtesy of the most recent email bulletin from ACAT.

If you are considering a like-kind exchange (also known as a Section 1031 or Starker exchange), you need to review the IRS regulations that apply…and do it right.

Like-kind exchanges allow investors to defer taxes when they dispose of property they currently own and replace it with similar property.  However, the Internal Revenue Service plans to increase audits and enforcement of these exchanges beginning mid-2008.

Usually when a business or investment property is sold, the seller must pay tax on any profit.  The tax varies depending on the type of income and the current tax rate.  For example, if you purchased land for $100,000 and sold it for $200,000, you could expect to owe $15,000 federal income tax on the transaction, assuming a current capital gains tax rate of 15%.

With a like-kind exchange, it is possible to purchase property for $100,000, sell it for $200,000, buy another like-kind property for at least $200,000, and avoid income taxes on that sale.  But you have to follow the IRS rules precisely, and this requires planning prior to the transaction.

First, the property sold and the replacement property must be “like-kind.”  IRS rules and regulations offer guidance to help determine what qualifies as like-kind property.  For example, you can exchange a single-family home for an office building, or an apartment complex for a shopping center. But you can’t exchange your home for an oil well and you can’t exchange real property for a business. 

Second, many like-kind exchanges will require the assistance of a qualified intermediary in order to comply with all of the requirements for a tax-free exchange.  You can usually find a qualified intermediary in your area by checking the Yellow Page listings under “Title Companies.”

All like-kind exchanges must be reported to IRS by filing Form 8824 with your federal income tax return.

Sounds confusing?  Studies by the IRS and the Government Accounting Office have found consumers don’t understand the rules.  But help is on the way.

The IRS has updated Publication 17 “Your Federal Income Tax” to better tell taxpayers about like-kind exchanges.  Additional information about the like-kind exchange process is found in IRS Publication 544 “Sales and Other Dispositions of Assets,” and in the instructions for Form 8824.

There are significant savings you can realize. But the best advice is to get your accountant involved at every step.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice.  For information on how these general principles apply to your situation, please consult an accounting or tax professional.