Q:

Subject: another sec 179 question

 

My husband bought a new truck for his business 7/27/05

Financed (paid) $48,194.77 with a $2,707 trade in –

Truck weighs 9200 pounds and was used 80% for business (from 7/27 to 12/31/05)

IN GENERAL – what is his section 179 deduction?

Gross sales $30316

Thanks

A:

You and your husband should be working with a professional tax advisor on matters such as this.  What you pay him/her will be a tiny fraction of the tax savings you should be able to realize.

For the Section 179 and depreciation calculation, you need to add in the sales tax you paid on the new truck to get the proper cost basis to work with.  In a rough sense, the amount eligible for Section 179 is the net cost paid after the trade-in, which would be $45,487.77 (plus sales tax) multiplied by the 80% business usage, for a net of $36,390.

The actual deduction that can be claimed on your 1040 will be limited by the amount of business net (not gross) income, including from other sources, such as W-2s. 

Your personal professional tax advisor will be able to give you more specifics.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Question regarding 179 expense

Hello,

I happen to stop by your web site and read your article regarding 179 expense.

 

I am a major stock owner of a S corporation.

Last year, the company got not a samll loss

 

I have other source of income and overally I have some income to report last year.

In this case, may I apply section 179 expense deduction for the S-Corp.

 

Your prompt and kind reply will be highly appreciated.

 

Best regards 

A:

As your corporate tax accountant can tell you, an S corp with a net loss before counting the Sec. 179 deduction cannot claim Sec 179 on that year’s 1120S. Sec. 179 is limited at the S corp level, and it doesn’t make any difference whether or not the shareholders have other income to offset it.

Work with your corporate and personal professional tax advisors to work out the best strategy for your unique situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your kind and concise answer

bye

 

 

Q:

Subject: Section 179 Deduction

I’m hoping you can answer my question.  I work in a bank and I’m wondering about the effect of the 179 deduction on the company cash flow.  Is this considered a depreciation expense that can be added back to get traditional cash flow?  (net income + depreciation + interest expense)

A:

Section 179 is essentially a form of accelerated depreciation and is usually included on the same expense line with regular depreciation expense, except for pass-through entities, where it is shown separately on the K-1s because of the individual-level limits . 

Any adjustments you make to book income to add back in depreciation expense should be sure to add back the Section 179 if it is not already included in the stated depreciation total.

Kerry Kerstetter

 

Q:

Subject: question

 

If I take the section 179 deduction of $25,000 on my new truck for 2005 can I take mileage in 2006?

Thanks

A:

No, and here is why.

The IRS standard mileage rate includes a portion for straight line depreciation (17 cents per mile for 2005 & 2006).  If you use the actual expense method of deducting vehicle costs, and use the straight line depreciation method, you are allowed to switch to the standard mileage rate in subsequent years for that particular vehicle.

However, if you use any accelerated depreciation method, of which Section 179 is the most accelerated, you must stick with the actual expense method for as long as you have that vehicle.  To allow you switch to the standard mileage rate would in effect be allowing you to over-depreciate the cost of the vehicle.

I hope this helps.  Your personal professional tax advisor can give you more specific figures for your particular situation.

Kerry Kerstetter

 

Q:

Subject: Section 179 of the Internal Revenue Code

 

Good Afternoon,

 

In regards to Section 179 of the Internal Revenue Code. I have a small computer repair company I need to purchase a larger truck to visit clients and move equipment. I would prefer to purchase an SUV as that would be more practical than a Van . My question is does the auto need to be new or can it be used.

Thank You

A:

It just has to be new to you; not brand new.

You can see the rules for Section 179, including the weights of SUVs, on my main website.

You really should be working directly with a tax pro who can help you tailor things to your unique circumstances.

Good luck.

Kerry Kerstetter

Q:

Dear Kerry:

Our corporation can purchase the 2006 Denali Pickup with the crew cab and short bed for $39,784.  No trade-in or down payment is involved.  The GVW is 7,000 lbs.

Please let me know as soon as possible if this vehicle would qualify for the full deduction or do we need something bigger?

A:

You’re not going to believe this one.  I checked the specs for that Denali on the GMC website and they show the short bed as being 69.2 inches long. The rules for deducting more than $25,000 for a vehicle specify that it:

“is equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment”

Since six feet is 72 inches, the short bed is 2.8 inches too short to qualify for more than a $25,000 Section 179 deduction.

While the Standard Box is specified as being 78.7 inches long and the Long Box as 92.6 inches, neither seems to be available with the crew cab. 

I hope this helps you decide what vehicle to purchase. Remember that even if you can only claim $25,000 under Section 179, the remaining cost can be depreciated over the five year life of the vehicle.

Kerry

 

Q:

Subject: Yet another Section 179 Q

Hi Kerry,

Sure appreciate your blog and I thank you in advance for any insight you can provide.

A friend of mine started an LLC this year with another partner/member.  They wrote a note for this “Asset Purchase” and acquired mostly computer equipment, which happens to be the total assets they’ll start with at the newly formed LLC.  They purchased the computer equipment from the same company they used to work for and would have been “rightsized” out the door from if they had not agreed to this “opportunity”.

 Would these computers qualify as Section 179 property so long as they only attempt to deduct up to $105K in year 2005?

 Thank you,

A:

As long as they didn’t have an ownership interest in the previous owner of the equipment, it should qualify for possible Section 179 expensing.

The actual amount of the Section 179 deduction that can be claimed will depend on the amount of income the LLC has.  It can’t be used to create a net loss.
 
Your friends should be working with their own professional tax advisor to make sure they handle the LLC properly rather than rely on second hand information.  There are dozens of ways in which they can screw things up if they try to handle things on their own.

Kerry Kerstetter

Q:

Subject: Section 179 Upper Limits

Hello–

 

I have the opportunity to purchase (and take delivery) of two qualified pieces of equipment.  One costs $79,000 and the other $133,000.  Is my 2005 deduction limited to the $105,000 (plus accelerated depreciation) or is it $79,000 + $105,000 = $184,000 (plus accelerated depreciation)?

 

Thanks.

A:

The $105,000 limit is per tax return, not per asset.  You could have dozens of items totaling $105,000 or just one.

As I have described several times, a 1040 can claim $105,000 in Section 179 and a C corp can also claim up to another $105,000 on its 1120.

If you are spending this much money on business equipment, you are being very irresponsible by not working with a tax pro who can assist you and ensure that you don’t screw things up.

Good luck.

Kerry Kerstetter

Q:

Subject: section 179

Hi,

I’m thinking of purchasing a new vehicle in 2006 (no SUV)

I’m self employed realtor.

Is there still a bonus depreciation (exta$) deductible on 2006 returns?  I think you can write off a lot in the first 3 years but I’m not sure.

Thanks

A:

You really should be discussing this with your own personal tax advisor.  If you are trying to operate as a professional Realtor without a professional tax advisor, you are asking for big trouble.  Buying a new vehicle just for tax breaks would be a big mistake.  Don’t make matters worse by trying to do this on your own.

I assume that you are looking at buying a lighter weight vehicle. The maximum Section 179 for a vehicle under 6,000 pounds is much lower than for one over 6,000 pounds.

I have this all explained on my website.

but only a qualified tax pro will be able to give you more specific numbers for your situation.

Good luck.

Kerry Kerstetter

 

Q:

Subject: 179 Depreciation

 

I have a vehicle placed in service December 19, 2003.  I used the full first year depreciation in the 2003 tax year.  I am now considering trading it off and leasing a different vehicle.  What are my tax consequences for the vehicle I trade off and for my new vehicle? 

Example; Would I owe back depreciation.  I have a $12,000 payoff on my current vehicle.

A:

If you expensed the entire cost of your vehicle on your 2003 tax return, its adjusted cost basis on your books is zero.  Whatever you sell it for will be taxable as depreciation – Sec. 179 recapture.  Even if you don’t receive any money and the loan is paid off, you will have a sale for the $12,000 loan balance.

If you trade it in for the purchase of a more expensive business vehicle, the gain can be deferred by reducing the cost basis of the replacement vehicle.

Selling the current vehicle and then leasing a new one will not qualify unless you trade it in and the lease is treated as a purchase, such as with a one dollar buy-out at the end.  If the buy-out is the vehicle’s fair market value at the end of the lease, that is not the same as a purchase.

You really should be working with personal tax pro to see what is the best strategy for you.  I have almost always found that leasing vehicles is a much more expensive (rip-off) way to go than a normal purchase; so you should work with your personal tax advisor to see if that makes sense.

Good luck.

Kerry Kerstetter