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Archive for the ‘179’ Category

Sec. 179 is still with us…but with a much lower maximum

Posted by taxguru on April 3, 2014

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!!!

 

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

 

Posted in 179 | Comments Off on Sec. 179 is still with us…but with a much lower maximum

Tax Breaks Drop in 2014

Posted by taxguru on December 31, 2013

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. 

 

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

 

Posted in 179 | Comments Off on Tax Breaks Drop in 2014

Defining “Placed Into Service”

Posted by taxguru on December 8, 2013

One common mistake taxpayers often make in regard to claiming Section 179 and depreciation deductions is the proper timing of it.  Many believe that they can simply pay for new equipment in the last month of their tax year (December for calendar year taxpayers) and claim the deductions on that year’s tax returns, even though the items aren’t received or used until the next tax year.  That issue led to this interesting recent email exchange from a reader. 

Reader:

Subject: What constitutes service for Section 179?

Dear Kerry,

Thought this might be something good to blog about, so I am sending you a question we receive mixed responses on…

We have recently agreed to purchase a piece of Large Medical Equipment. The agreement has been signed in December, and partial installation will occur in December with the full installation to complete in January.

We will begin training on the system in December. Can you help me understand the definition of “placed into service?” 

Officially, we will begin web-based training and didactic training in December on how to use the system, and a portion of the system will be installed. The product will not be fully installed until January, but essential parts (training, install) will begin in December.

Since the training process and installation begins (essentially starting the “use”) in December, will the equipment expense qualify for the Section 179 in 2013?

Thanks,

 

My Reply:

As much as I love to stretch the laws as much as possible in favor of the taxpayer, I wouldn’t feel comfortable deducting the cost of this new equipment on a 2013 tax return.

Placed into service generally means using the equipment itself for the business purposes, which would mean doing the analysis or tests on patients, or whatever the equipment is intended for.

Training on the actual operational equipment might be a closer step to a valid Placed in Service test; but the equipment not being operational and doing the training only on simulators just doesn’t cut it.

You’re just going to have to wait until your 2014 to deduct the cost of this equipment.

Good luck. I hope this helps.

You’re correct that this is a good topic to include in my blog. Thanks for writing.

Kerry Kerstetter

 

Follow-Up:

Thanks…interesting caveat…this type of equipment can take 1-2 months to install, and additional time to train all staff and doctors to finally “use on a patient.”

“Using” or “placed into service” really seems to be the key terms to understand. The company must train (aka: place into service) on the device prior to someone actually “using it” on a patient, and they will not begin training until it is purchased. So, in a fair world “use”, in my opinion should be the actual beginning of the training process. What a crazy world…

Thanks for writing back!

Sincerely,

 

My reply:

I wouldn’t feel comfortable trying to defend against IRS the beginning of installation and training as “placed into service.” However, if you and your professional tax preparer do choose to take such a stand, please keep me posted over the next few years as to whether IRS accepts your interpretation.

Good luck.

Kerry

 

TaxCoach Software: Are you giving your clients what they really want?

 

 

Posted in 179, Deductions | Comments Off on Defining “Placed Into Service”

Sec 179 for Equipment Leasing

Posted by taxguru on May 1, 2013

Q:

Hi Kerry.
 
I am very impressed by your site and the knowledge presented.  I have a question about 179 deduction:
 
My company is in the process of purchasing used equipment (frozen yogurt machines) to lease to frozen yogurt shops in the area and put in production this calendar year.  Most of the references on the site are for businesses that are purchasing it for their specific business.  Do I get the benefits of $139,000 deduction even though the equipment won’t be used specially for my business?
 
Thanks!
 

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

 

 

Posted in 179 | Comments Off on Sec 179 for Equipment Leasing

Recapturing Depreciation

Posted by taxguru on February 27, 2012

 

Q:

Subject: Section 179 deduction question

Hi Kerry, I hope you’re doing well today. I came across one of your tax guru web pages (http://www.taxguru.org/incometax/Rates/Sec179.htm) as I was seeking some tax advice. Thank you in advance for providing the information. I do have a question and wondering if you wouldn’t mind assisting me as it pertains to section 179.

I had purchased and placed in service a 2010 Cadillac Escalade (shorter model) on Sept. 9, 2010 as I am a self-employed individual and had utilized the vehicle for my consulting business (sole proprietor) the day of inception thru the remainder of year 2010 and all of year 2011. I had taken the section 179 deduction for tax year 2010 of $25,000 plus the allowable bonus depreciation of $11,855 for a total of $36,855 deprecation deduction in tax year 2010.

At this time, I hit extremely difficult income times as my income has decreased over 70% starting from the beginning of October 2011 to present as my consulting contracts have just about dried up and now I have to look at getting rid of assets. Unfortunately, I can’t afford the Escalade at this time and need to dispose of it immediately. If I were to sell it outright today and not trade it for any like-kind exchange, what tax implications would I be looking at for tax year 2012 meaning, what estimated tax do you think I would have to pay in the disposition of the Escalade? Additional information is I claimed the 5 year recovery period using the 200 DB-HY method/conversion and entered the cost basis of the esclade as $61,855 (that’s what I paid for it).

I’m only asking for an estimate, if you can provide one, and thank you very, very much in advance, if you’re able to provide an answer. I really appreciate it.

best regards,

 

A:

Calculating the taxable gain is pretty straight forward.

Add up all of the Section 179 and depreciation deductions you have claimed for the vehicle and then subtract that from your original purchase price. That will give you the adjusted cost basis (aka Book Value) of your vehicle. Anything above that amount that you sell it for will be your gain.

This gain, which is technically depreciation recapture, will be taxed as ordinary income on your 1040. The actual rate you will be paying for it will depend on your other income and deductions and what tax bracket you are in.

A professional tax advisor can work with your specific numbers to get you a more precise estimation of the tax effect of the sale. Another way to do this, if you are taking the risky approach of preparing your own tax returns, is to use whatever software you have for the 2011 returns and prepare a proforma 2012 with the sale of your Escalade and your other estimated 2012 figures.

You didn’t say whether you paid cash for the Escalade or financed it. The gain calculation is the same either way. However, you need to remember that the debt relief from the pay-off or assumption of any loan you may still have on the vehicle is considered to be the same as receiving cash by IRS. The total sale price will be the loan balance paid off plus any cash you receive.

Good luck. I hope this helps.

Kerry Kerstetter

 

 

Posted in 179, 4562, Vehicles | Comments Off on Recapturing Depreciation

Sec. 179 assets have to be used in the USA

Posted by taxguru on August 17, 2011

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.

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in 179 | Comments Off on Sec. 179 assets have to be used in the USA

Sec. 179 For Fruit Trees

Posted by taxguru on December 4, 2010

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

Posted in 179 | Comments Off on Sec. 179 For Fruit Trees

Misunderstanding Sec 179 Maximums

Posted by taxguru on September 29, 2010

 

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.

 

TaxCoach Software: Are you giving your clients what they really want?

 

 

Posted in 179 | Comments Off on Misunderstanding Sec 179 Maximums

Section 179 Increased For 2010

Posted by taxguru on March 18, 2010

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.

According to this official summary of the law, this change is only for 2010.

Title II: Expensing – (Sec. 201) Increases to $250,000 the expensing allowance for depreciable business assets for taxable years beginning after 2007 and before 2011.

Since the maximum deduction is scheduled to fall all the way to $25,000 in 2011, there should be a good chance of another law raising it for that year.
Considering that I receive several emails each day about Section 179, I knew this would be of great interest to my readers.

Posted in 179 | Comments Off on Section 179 Increased For 2010

S Corp Vehicle Purchase

Posted by taxguru on December 31, 2009

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

 

 

Posted in 179 | Comments Off on S Corp Vehicle Purchase