Tax Guru – Ker$tetter Letter

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Offsetting other income with Sec. 179

Posted by taxguru on November 20, 2008

Q:

Subject:  2008 Section 179

I found your info on the web. I have a quick question. I am looking at a cap gains tax on the capital account of an LLC which I left in January. The account is about $460,000 and the tax about $69,000.

I am considering starting a property restoration business and the equipment is about $20,000 to $30,000. I might also need a van. If I spend 30,000 on equipment, will that reduce my cap gains tax by $30,000 because I am deducting 100% up to $250,000?

Thanks,

A:

This is something that you need to work on with the assistance of your personal professional tax advisor because it is more complicated than you are assuming.

The first misconception you have is regarding how the Section 179 deduction reduces taxes.  It is a deduction and not a credit; so it reduces taxable income and that reduces the income tax only by a percentage.  It is not a 100% reduction of tax as a credit would be. The amount of actual tax savings will be based on your Federal and State tax brackets, along with several other factors.  So, a $30,000 Section 179 deduction may only reduce your net taxes by only $10,000; not by $30,000.

The other big issue that you need to deal with is the limit on the Section 179 that you can claim based on your business related income. Normal capital gain income does not qualify for the Section 179 purposes, so the gain on your LLC termination can’t be offset against new Section 179 unless it also includes business profit and depreciation recapture.

The best thing to do would be to have your personal professional tax advisor run some pro-forma 2008 figures for you based on the real info you have, as well as the different assumptions you want to test in order to get a realistic estimation of any potential tax savings from buying and starting to use new business equipment before the end of 2008.

Good luck.  I hope this helps.

Kerry Kerstetter


Follow-Up:

Yes very helpful.

Thanks a lot.

 

 

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