Q: 

Subject: Section 179

Hi Kerry

I saw your blog online and wanted to know if you had heard whether 179 was being extended or renewed for 2014.  I am looking for information on this and thought I would contact you since I saw your email. Thanks for the great blog!

A:

Section 179 has been around for a very long time and there has never been any serious talk about eliminating it entirely or allow it to completely expire.

What does change, and what you are most likely referring to, is the maximum amount of the Section 179 deduction. As you can see on the chart on my website, this has had dramatic changes over the years.

One of the biggest changes does happen to be from 2013, with a maximum deduction of $500,000 to 2014, where it dropped to just $25,000. Unless our rulers in DC make changes to this, that $25,000 will only increase based on inflation for future years.

I hope this info helps.

Kerry Kerstetter

Follow-Up:

So companies can only take a max deduction of 25,000 on new business equip purchases? Wow that is a drop! Thank you so very much for responding. I really appreciate it.

My reply:

Not to get too political about this; but the maximum Section 179 was bumped up so high in order to encourage investments in business equipment as a means of stimulating the economy.  Now that our Supreme Leader has declared that the recession is over, he and his followers in DC see no need for the extra 179 deduction.

Of course, those of us living and working in the real world know all too well that the recession is nowhere near over, but has gotten worse since the 2008 election.  Unfortunately, tax policy is determined by the lies that are floating around DC and not by what is happening in the real world.

Kerry Kerstetter

Final Point:

Don’t worry… I live in Texas… I agree totally with your statement!!!!!! Thanks Kerry for all of your help!!!

Our rulers in DC  love to tinker with the tax code and add special temporary tax breaks so that the tax environment is in constant evolution.  As these news items explain, several temporary tax breaks expire at midnight tonight. 

Congress letting billions in tax breaks expire at year’s end

Congress letting 55 tax breaks expire at year’s end

What they don’t mention is the fact that the Section 179 expensing election maximum deduction drops from $500,000 for 2013 to just $25,000 in 2014. 

If recent history is any guide, there will most likely be an early 2014  push by our rulers in DC to reinstate many of these expired tax breaks retroactively to the beginning of the year.  Of course, there is no guarantee that this will happen; so don’t make plans assuming it will.  As always, the actions and inaction of our supreme rulers in DC do nothing but add to the uncertainty about the business and tax environments. 

Q:

A:

Machinery that is leased to another user can possibly be claimed under Section 179 because, while the renter will be using it to prepare the frozen yogurt, your company will be in the business of leasing it.

You didn’t say whether your business is incorporated or not.  This is important because an unincorporated business may only claim the Section 179 deduction if:

1. the term of the lease (including options to renew) is less than 50% of the equipment’s class life
and
2. For the first 12 months after the property is transferred to the lessee, the total business deductions on the property exceed 15% of the property’s rental income.

I hope this helps.

Kerry Kerstetter

 

Q:

Subject: Foreign assets and sect 179

I saw your informative web page concerning 179 property.

Where are foreign assets carved out from its application?

A:

From the IRC on TheTaxLibrary:

§ 179(d) Definitions and special rules

§ 179(d)(1) Section 179 property

For purposes of this section, the term “section 179 property” means property—

§ 179(d)(1)(A) which is—

§ 179(d)(1)(A)(i) tangible property (to which section 168 applies), or

§ 179(d)(1)(A)(ii) computer software (as defined in section 197 (e)(3)(B)) which is described in section 197 (e)(3)(A)(i), to which section 167 applies, and which is placed in service in a taxable year beginning after 2002 and before 2013,

§ 179(d)(1)(B) which is section 1245 property (as defined in section 1245 (a)(3)), and

§ 179(d)(1)(C) which is acquired by purchase for use in the active conduct of a trade or business.

Such term shall not include any property described in section 50 (b) and shall not include air conditioning or heating units.

§ 50(b) Certain property not eligible

No credit shall be determined under this subpart with respect to—

§ 50(b)(1) Property used outside United States

§ 50(b)(1)(A) In general

Except as provided in subparagraph (B), no credit shall be determined under this subpart with respect to any property which is used predominantly outside the United States.

From Page 9-15 of TheTaxBook:

Other nonqualifying property:

• Air conditioning or heating units.

• Property used predominantly outside the United States, except property described in IRC Section 168(g)(4).

 

From Page 17 of IRS Publication 946:

Excepted Property

Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property.

· Certain property you lease to others (if you are a noncorporate lessor).

· Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.

· Air conditioning or heating units. 

· Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code.

I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank you VERY much. I blew right by section 50. I had seen Pub 946. I don't believe I have ever laid eyes on section 50.

Q:

Subject: Qualifying Property – Fruit Trees
Kerry:
In your article on Section 179 revised April 27, 2010, you listed fruit trees as qualifying property from the Depreciation QuickFinder Handbook.  Will you please tell me where you found in QuickFinder that the trees were qualifying?
Thank you!

A:

I haven’t purchased any new QuickFinder books for a few years; since I switched to TheTaxBook. However, I did keep my old copies of the QF books I had.

Attached is a copied & scanned copy of Page 5-5 from the 2005 Tax Year Depreciation QuickFinder Handbook.  I’ve circled in red the Fruit Trees item in the list of property qualifying for Section 179.

I hope this is helpful for you.

Kerry Kerstetter

From Tax Info

Update:
I recently purchased a copy of the 2010 edition of the Depreciation QuickFinder and it has the following lists:

From Tax Info

Q:

Subject: Advice Please- You are the only one who knows this, it seems

Hello Mr. Kerstetter,

 

I came upon your blog on section 179 regarding maximizing the deduction.  I am the sole shareholder for my S Corp  which will have about $30,000 of sec 179 purchases this year, 2010.  My salary is $100,000 and assumed taxable income for S Corp in 2010 is $50,000.  According to your blog (I’ve copied below), I can take the maximum of $130,000 sec 179 deduction ($30K from purchases and $100K from my salary.  Is this right?  Can you please give me a publication reference or any official rulings for this rule?  My CPA doesn’t know about this, and I would like to refer him to it! 

 

Thanks so much in advance.

A:

Either I am misreading your question or it looks like you are misunderstanding the concept of the Section 179 deduction.

Section 179 is in essence a type of accelerated depreciation for the cost of business equipment, allowing its cost to be deducted in the first year rather than spread out over several years.

Although your W-2 and other income give you a potentially higher maximum Sec. 179 deduction, it is still limited to the cost of the newly acquired qualified equipment.  This means that if your business only purchased $30,000 of equipment, that is the maximum Sec. 179 that can be claimed for this year.  Of course, if you do purchase another $100,000 of equipment before 12/31/10, the Sec. 179 deduction would be much higher.

I hope that helps clarify the issue.

Good luck.

Kerry Kerstetter

Follow-Up:

Mr. Kerstetter,

 

Thank you so very much for your reply!  Yes, I was missunderstanding the concept of section 179 and you have cleared it up for me.

The President signed a new law today nicknamed the HIRE Act, which had been referred to as a jobs bill.

Almost all of the press coverage seems to be on the convoluted credit and reductions of some payroll taxes for some employees that at first blush seem to be a big pain in the butt. Here is the IRS’s official announcement of this new law.

What caught my attention was an email alert from Spidell that mentioned that this law also increases the Section 179 expense

Extends the existing §179 expensing ($250,000 with an $800,000 threshold) for another year;

Since the maximum Section 179 had dropped back to $134,000 for 2010, this is a much more useful tax break than the new payroll ones.

Q:

Subject:  Section 179

Can the two shareholders of an s-corporation take a loan to purchase a company vehicle and be able to get the 179 deduction?  The lender will not lend to the company but will personally to the 100% shareholders.
Time is of the essence to buy today or tomorrow
Thanks

A:

That is a very similar situation to the one I discussed in one of my earliest vidcasts regarding an LLC. 

LLCs and S corps are very similar for tax purposes, so this should help you.

As always, you should be working with an experienced professional tax advisor to make sure you set everything up properly.

Good luck.

Kerry Kerstetter