Q:

Subject: Question 4 Guru

 

Kerry,

 

Your site is very informative and I extend many thanks. 

Would you have the time to field a question?

 

I am considering purchasing a SUV ($30K) & tools ($12K) for the company (S-corp) in year 2006, all of which would be have 100% business use.

I would like to make a sec 179 election for $37k ($25k+$12k).

What would be the impact of selling the SUV in ’07, ’08 for:

$20k?

$15K?

$10k?

 

Please advise,

A:

If you are serious about running a business properly and staying out of trouble, you should be working directly with a professional tax advisor who can help you with basic concepts such as this.

If you expense the full cost of an asset via depreciation or Section 179, your adjusted cost basis (aka book value) becomes zero.  If you ever sell that asset at any time for more than zero, the full amount is taxable gain (aka depreciation recapture). 

If you didn’t expense the full cost, whatever is left is your adjusted cost basis and any gain is the excess of the sales price over that amount.

There is no taxable gain if the asset is traded in on a new like kind asset.

I have covered this issue in several previous posts, such as:

November 2004

February 2005

October 2004

Again, any competent tax pro can help you with this kind of thing

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

 

I have a CPA who I is competent.  However, I am concerned with 2 things 1) asset protection and 2) tax liability.  I am interested in obtaining a second opinion and would be willing to pay for it.  Would you consider fielding questions for hire?

 

Please advise,

My Reply:

If your CPA couldn’t answer those very basic questions you sent me earlier, you really should be looking for another tax pro.

I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

Unfortunately, we don’t have anyone else to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you. 

Good luck.

Kerry Kerstetter

 

Q-1:

Subject: Section 179 deduction for “USED” SUV over 6000 lbs.

 

I have received information from my tax consultant who is not as versed in the business tax laws as I wish. I have just started my own consulting company and need to replace my old 1990 Jeep with something a bit more practicle for doing buisiness. I cannot afford a new $45,000 SUV (over 6000 lbs I know!) but would like to buy a clean SUV that’s got a couple of years on it for a lot less. Your webpage news says as long as the SUV would be new to me it would qualify for the Section 179 deduction. I intend to buy something under the $25,000 mark and over 6,000 lbs. Would I be able to do a 100% writeoff this 2006 tax year???? This issue of a used vehicle qualifying has not been completely or clearly answered anywhere I can find on line and I need to go buy something shortly. I really need your “yes” or “no” on this one.

Thank you,

A-1:

I’m not sure why you’re so confused.  The Section 179 deduction never required the asset to be brand new.  Some other kinds of first year bonus depreciation did have such a requirement; but Sec. 179 never did.

Assuming you buy an SUV weighing more than 6,000 pounds, you would then need to multiply its cost by the business usage percentage based on miles driven during 2006 to figure how much you can claim under Sec. 179, up to the $25,000 limit for SUVs.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

Wow, that is about the fastest response I’ve ever had to ANY e-mail!!

Your answer makes it clear, used is okay. Too bad I can’t wait until Dec 30th and use the vehicle 100% for work. I estimate I’ll be using it about 60-70% for business. That’s pretty simple math. What is this about a “bonus 30% deduction”??

A-2:

The bonus depreciation is no longer available.  When it was, it only applied to brand new business assets; so a used SUV wouldn’t qualify.

It sounds like you really need to be working with a professional tax advisor to address issues such as these rather than floundering around on your own.  Taxes are too messy and complicated to try to handle on your own.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Section 179 deduction

 

Mr. Kerstetter, In your opinion, can I use my salary (wages, salaries, tips) that I earn from a separate company to meet the Business Income Limit for taking the Section 179 deduction? My situation is:

 

I work for separate Company A and I earned $120,000 in 2005.  My wife and I opened a small business (LLC) partnership (Company B) in May of 2005.  My wife purchased $60,000 of new equipment to be used 100% in the new business and we were going to depreciate the $60,000 over time but we want to take a Section 179 deduction for the entire amount of $60,000 for the tax year of 2005.  Even without using the one time deduction, the new business did not show a profit for 2005 and if fact, in had a small loss.  My wife and I had no income from the new Company B, however, I had my salary from the separate Company A.

 

As I interpret the IRS regs I may use my salary to pass the “Business Income Limit” and I feel I can take the $60,000 deduction, even tho the new business did not show a profit, because my Taxable Income of $120,000 is more than the 179 deduction.

 

Do you agree?

 

Thank you very much.

A:

You really should be working with a competent professional tax advisor with something like this. 

From the way you described the situation, you may have screwed yourself out of the larger Sec. 179 deduction.  It hinges on who actually bought the equipment.

If you and/or your wife had bought the equipment in your own personal name and set it up on Schedule C or E of your 1040, you would be able to use your W-2 income to justify a Section 179 deduction for the full $60,000 cost.

However, if the LLC actually bought the equipment, the income limit for Sec. 179 is first applied at the LLC’s 1065 level.  If there is no net profit, no Sec. 179 can be deducted on this year’s tax return.

A tax pro may find something else after thoroughly analyzing the facts here; but it looks like you may be learning an expensive lesson by not consulting with a tax pro prior to purchasing that equipment.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for you opinion on this.  Appreciate you taking the time to get back me.

R/

 

 

Q:

Subject: Section 179 Deduction

“Qualifying Property

 Generally, the types of business equipment that qualify for this expensing election are the same kind that qualified for the now-defunct Investment Tax Credit. Most movable assets qualify.  Permanent structures do not qualify.  Business vehicles with a gross vehicle weight over 6,000 pounds qualify for the full Sec. 179, while lighter vehicles have a much lower dollar limit.” 

If a lighter-than-6000 pound vehicle does not qualify for the full Sec. 179, then how much do they qualify for?  Or where can I find that answer?

Thanks!

A:

From the QuickFinder Depreciation handbook:

For 2005, the Sec 179 limit was:
     $2,960 for passenger vehicles under 6,000 pounds
     $3,260 for trucks and vans under 6,000 pounds
     $8,880 for electric vehicles

The 2006 limits haven’t been announced yet.  They will most likely be the same as for 2005, or even lower, which happened between 2003 and 2004.

Kerry Kerstetter

Follow-Up:

Kerry, thanks!

 

 

Q-1:

Subject: Taxing of Mulitiply Corporations

 

Question:  Are there any tax rate consequences of owning 100% ownership of two small corporations.   In other words, are profits stacked on top each other for income tax rate purposes? 

A-1:

In cases such as that, referred to as a controlled group of corporations, you need to allocate such things as the lower tax brackets and the Section 179 deduction among them.  The corporations’ tax preparer needs to attach a statement to each 1120 explaining the allocation of these items with the names and FEINs of each controlled group corp listed.

Kerry Kerstetter

Q-2:

Thank you….

I’m just setting up the second corporation.   Would it be better if I owned….say only 80% of the second corporation …or would that not make any difference?

Thanks again.

A-2:

As I constantly have to say, it’s extremely dangerous to try to run one corporation without the advice and counsel of an experienced competent tax professional.  With multiple corporations, that danger is multiplied many times.

If you take a look at the applicable Code Section 1563 definitions, you can see how tricky this can get.  It’s not just an 80% ownership by a single party.  There are also attribution rules to consider, where ownership by related parties can be attributed to you, as well as the brother-sister controlled group rules with a 50% threshold among five or fewer owners.

Just because each separate corp may not be able to utilize the full benefit of the lower tax brackets and Section 179 deductions doesn’t make owning multiple corporations a bad idea.  There are several other reasons to do so, including liability protection, state income sourcing and payroll issues, to name just a few. 

A good tax and or legal pro should be able to help you structure things in the best manner to achieve your goals.

Good luck.

Kerry Kerstetter

 

Q:

Subject: sec 179

 

We are having trouble getting an answer on a sec 179 question. Some accountants are telling us that you can only use sec 179 if your business has a profit of larger than the 179 deduction. Some are saying that all income, even if it from other than the business, can be considered. How can we find out if our business can take use sec 179 for last year if our business did not make a profit but we had income from other sources and paid more taxes than the 179 deduction we would like to take?

Thanks for your help.

I answered a similar question in this post.

I assume you’re referring to an unincorporated Schedule C or F business.

In that case, other kinds of earned income, including that from W-2s and general partnership K-1s, as well as other profitable Sch. C & F  businesses on your 1040, will increase the limit on the amount of Section 179 that is deductible on your 1040 for that particular year.

This limitation calculation is done automatically by my Lacerte tax software.  I have heard that some of the other less sophisticated tax prep programs aren’t able to factor in other earned income in their Sec. 179 deductions.  You should be working with a tax pro who both understands this procedure and has software than can calculate the proper deduction, accounting for all income shown on the 1040, not just from that particular business.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Sec 170 deductibility clarification

Kerry, Could you please clarify the first year deductibility under sec 179 of a truck purchased this tax year 2006?  This truck is a Peterbilt Semi and has a GVW far in excess of 6000 lbs.  As I read your letter on Sec. 179 I see that there is a maximum allowance of $430k.  If I understand this correctly, I can purchase a couple of these trucks and take the deduction this year in full.

Any help you can provide will be appreciated.

A:

If you are planning to spend that much money on anything, you absolutely need to be working with a tax professional who can properly guide you.  No information on the internet or from strangers like me can do the proper job for what you need.

You seem to be dangerously misinterpreting the rules for Section 179.  As you can see on my website, the maximum deduction for 2006 is $108,000.  The $430,000 figure comes into play as a phase-out of that $108,000.  If you acquire more than $430,000 of Sec. 179 qualifying assets in the same year, that $108,000 maximum is reduced.

There are ways to avoid that problem, as well as double the annual Section 179 limit through the use of a C corporation.  Any competent tax professional can help you with that kind of plan.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your quick response.  As I finished my request to you, our CPA called and I clarified with him exactly what you mentioned here relative to the $430k limit and he explained how this limit applies.

Thank you again.

 

Q:

Subject: motorhome

 

Dear Kerry,

 

I’m a Sales Manager for a company that makes lasers.  I hate to fly, I hate airports, and I love seeing things along the way while in motion on the ground.  Do you have any thoughts about Section 179, or any other protocol, whereby a truly genuine salesman who is expected to travel to customers could capture a motorhome at an effectively low cost?

 

Thank you sincerely,

A:

I have seen people deduct motor homes under similar situations as you describe.  As with any vehicle, you will need to document the business versus personal miles it is used.  It would also help to have your employer provide you with a letter stating that such a vehicle is necessary for your job and that they are not able to provide you with one.  You will also need to coordinate how your are reimbursed by your employer for its use, such as a per diem or a per mile, and you will need to properly account for such reimbursements on your Form 2106.

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

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you indeed Kerry.

Q:

I am considering a year end purchase of a lease back sailboat.  I am retired and my only income is taxable capital gains on real estate investments sold during 2005.  Can Section 179 be used to offset real estate capital gains?

Thx,

 

PS  Your web site is very useful.

A:

Schedule D income cannot be offset with a Section 179 expense deduction; but gain reported on Form 4797 (usually for depreciation recapture) can be used against Sec. 179.

If this is going to be a regular thing, you may want to consult with your personal tax advisor about using a C corporation to enable you to offset capital gains and losses on your boat rental business.

Good luck.

Kerry Kerstetter

 

How GM Trains Dealers of Big SUVs To Calm Gas-Price Fears

I was surprised to not see any mention in this article of the lucrative tax breaks, such as Section 179, that are available for purchasing business vehicles weighing more than 6,000 pounds. 

I can still remember receiving a letter from American Motors Corporation in 1984, shortly after our rulers in DC enacted the luxury car rules that drastically limited the depreciation of business vehicles.  The letter was addressed to tax professionals and pointed out the 6,000 pound loophole, which allowed buyers of the Jeep Grand Cherokee (weighing just over 6,000 pounds) to claim much higher depreciation deductions, along with more Investment Tax Credit, than buyers of vehicles weighing less than 6,000 pounds. 

GM should try that approach, especially since there seem to still be lots of tax pros who are unaware of the 6,000 pound loophole that’s only been in the law for 22 years.