Q:

Subject: Section 179

 

If I purchase equipment for the sole purpose of leasing or renting it to my customers is this equipment “Qualifying Property”?  It would be machinery

and motor scooters.

The reason I ask is that you say “Nonqualifying Property:

* Property held for the production of income (investment property, most rentals).

most rentals is vague.  If rental is my business would I my personal property I rent to others be “Qualifying Property” or “NonQualifying Property”

Also I’am a small minority owned business.

Thank for any help you might have.

A:

You should really be working with your own professional tax advisor on matters such as this. 

Whether your scooters qualify for Section 179  depends on how long the rental periods are.

The following quote from the Depreciation QuickFinder Handbook spells it out very well.

“Leased Property.  For noncorporate taxpayers, leased property is not eligible for 179 expense, unless:

The taxpayer purchases the property to lease to others and both the following tests are met:

1.  The term of the lease (including options to renew) is less than 50% of the property’s class life.

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

This rule does not apply to corporations.”

In your particular situation, this means that if you are leasing the scooters for less than 2.5 years per renter, and you are paying the maintenance costs, you should be eligible to claim Section 179.  If you are renting on a per day or per hour basis, you would definitely qualify.  If you are leasing for several years at a time and the lessees has to pay all of the maintenance costs, Sec. 179 wouldn’t apply.

Of course, the amount of actual Section 179 deduction will be phased out if you place into service more than $430,000 of new qualifying assets during 2006.

I hope this helps.  A tax pro can better apply these rules to your unique circumstances.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for the reply and info.

 

 

Q:

Subject: What is your opinion?

 

I have been trying to read up on the best way for our business to go, so I would like your opinion.

We have a poultry and cattle farm.  We have asked a lawyer and our accountant.  The lawyer says s-corp to avoid double taxation and our accountant says c-corp; there won’t be much profit after all of our deductions and if there was we could buy something at the end of the year and do section 179.  The accountant also says we are not providing a service for the public and the IRS will not recognize us as a s-corp.

Since we are just getting into this, we really want to go the right way to begin with.  What do you think?

Thanks,

A:

There’s no way I can say what would be the appropriate format for you to use.  Only someone who has closely reviewed your current and future situation can do that.

I do find it very unnerving if the quote from your accountant is accurate.  S corps do not have to be service oriented.  S/he may be confusing it with a PSC (personal service corp) because many farms are set up as S corps.

Make sure your lawyer has reviewed the many tax saving opportunities of C corps and isn’t just focusing on the perceived double taxation issue to the exclusion of all of those other areas, as far too many lawyers do.

It sounds as if you  may need to consult with a tax pro who better understands how corporations function.

Good luck.

Kerry Kerstetter

 

Q:

Subject: section 179

 

i am very confused on section 179. does the purchase have to be on NEW or can USED equipment qualify?

A:

It just has to be new to you.  It’s all explained on my website.

Kerry Kerstetter

 

Q:

Subject: Section 179

 

Kerry,

 

We are trying to figure out whether Section 179 still applies to RV’s in 2006; it was our understanding that 2005 would be the last year. Could you help us with this?

 

Thank you,

A:

For some reason, that bit of misinformation has been circulating for several months now by many irresponsible people.

As you can see from the info on my website, the rules for 2006 are the same as they were for 2005, except that the maximum has been increased to $108,000.

Kerry Kerstetter

Follow-Up:

Kerry,

Thank you so much for your quick response.  We really appreciate it!

 

 

Q:

Subject: Section 179

I assume you get hundred of random dumb emails so I would like to apologize if this is just another one.  To minimize the inconvenience I have attempted to keep my questions short.

I am trying to understand the 179 rules as it pertains to a business opportunity which is being promoted in the boating world.

1. My question is can you deduct the boat under 179 if used in a S or LLC structure. The purpose would be for a sailing charter business.

2 The vessel is currently in a S corp, and for sale at 550K.  Would it make sense to purchase the S Corp instead of a asset purchase and book the asset (the Boat) at 400K and the Goodwill at 150K. Thus meeting the 430,000 limitation on 179.

3. For the purpose of building basis, does making monthly payments into the corporation and have the corporation pay the finance company allow me to build basis as paid in capital.

4. Does signing for the note personal negate the 179 because of limitations on converted assets or does it act as paid in capital , once the boat is listed as a corporate asset?

Thank you for your time.

A:

You most definitely need to be discussing all of these points with your own personal professional tax advisor.  As I have to continuously warn people, this is not a place for do it yourselfers, especially when you get into S corps and dollar figures that large.  Without competent professional help, you are pretty much guaranteed to screw things up and get yourself into big trouble with IRS, which is currently undertaking a special examination program of S corps and their shareholders.

Some points in your email that you will need to discuss with your personal tax pro include the following.

1.  Purchasing assets to be leased, such as expensive boats, is very often done through the use of an LLC or S corp.  How much actual deduction the shareholders or members will receive depends on too many things (many of which are covered on my website) to be able to give anything close to a “one size fits all” answer. 

2.  Section 179 can only be claimed on newly acquired assets that are being placed into service.  If you were to buy the corp stock, no new Sec. 179 could be claimed for assets that it already owned.   If you were to set up a new LLC or S corp and it purchased the boat from the previous owner, a new Sec. 179 deduction is possible.

3 & 4.  Shareholder basis in S corp stock is far too complicated for me to detail here.  However, you are correct that the more money you pay into your corp capital account, the higher your personal basis would be.

Kerry Kerstetter

 

Q:

Subject: 179 Depreciation

Can a Game Center business take the 179 expense for the video games purchased a during the year? I was thinking it is consider asset but does it has to be a fixed one.  I think you can because it is consider software. Also how should I calculate depreciation for a short year. The business open in May of this year and most of the property was purchased and placed into service in June expect for two Xboxes which was purchased in November.

A:

You really should be discussing this with your own personal tax advisor.  If you are trying to operate as a legitimate for-profit business without a professional tax advisor, you are asking for big trouble.

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: 1031 Like Kind Exchange

Hi,

A quick question for you if you have time about a 1031 Like Kind Exchange.

 

In 2002 I sold a resort in South Texas with a $300K profit, $120K went to our residence (not taxed) and the remainder was rolled over with a 1031 when we bought a resort in Eureka Springs. Sold that resort last Aug. with a $190K profit also showing $120K as residence. I bought another type of business, sales, no resort or lodging and I am now being told that I am looking at anywhere from a $10K to $100K tax bill this year since I did not roll that money over to the same type of business. The new business I bought was $262,500.00 and all that money came from the sale of my last business, I rolled all my money over into my new business and am being told that I now have to pay taxes on both resorts profit. Is this so, all my profit went right into another business!

 

Friends from Eureka told me about you, happy to see that you are my neighbor, are you taking new clients and can you help me keep my money?!?!?!?!?!?

 

Kind Regards, 🙂

A:

Two issues in your email don’t look good.

A 1031 exchange is technically called a “Like-Kind Exchange.”  The old and new assets have to be the same kind.  The most common is real estate for real estate, which sounds like what you had in 2002.  If you then disposed of real estate in Eureka and reinvested into other kinds of business assets, you can’t have a valid like-kind exchange and the real property sale is fully taxable.

The other issue is how the reinvestment was handled.  If you took the money from the Eureka Springs sale and used it yourself to buy new business assets, a 1031 exchange is not possible, even if you had purchased like kind real estate.  One of the rules of 1031 exchanges is that you cannot touch the money.  You either have to have it go directly from the first property to the replacement one, or you have to have a third party exchange facilitator hold it on your behalf.  Your email doesn’t mention an exchange facilitator.

You can see the rules for how 1031 exchanges should be handled at www.tfec.com

It sounds as if you didn’t get good advice before the disposal of your Eureka property; so you are probably going to have a big taxable gain to contend with.  If you didn’t seek out any advice before selling the Eureka property, you have just learned an expensive lesson.

The possible good news is that the new business assets you purchased may qualify for the Section 179 expensing election, which was up to $105,000 for 2005.  Your personal tax advisor should be able to help you in this regard.

As it says below, we are not accepting any new CPA clients.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your time and information Mr. Kerstetter.

 

 

I know that it’s been a very long time since I was in school; but when did they change the definition of a ton?

Q:

Subject: question about site info

hi there,

i read over the info on your site about section 179, and i didn’t find a clear answer about the suv’s.

can you tell me if i can take the 179 on the durango i just purchased in august of this year? it is only 4.5 tons i think, but the cost was only $25K. i am incorporated, as a S-corp. the durango is owned by my business 100%, it is not for personal use. i bought it mainly as a way to help with my taxes, and now i am confused as to if i am allowed to use this at all.

please help!

thanks!

A:

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

I assume that the Durango weighs 4,500 pounds and not 4.5 tons, which is 9,000 pounds.  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

Follow-Up:

i do have a personal tax advisor. she is on vacation until jan. 2nd, and i needed an answer before the 31st. i didn’t buy the vehicle solely for a write off, as it is my business vehicle. but it will act as a write off…

same as my computer equipment, software, and other items necessary for my business to operate. therefore my question was legitimate as i needed to know if i could use the section 179 towards the durango. (which would mean i needed to make another large payment by the 31st). i found out that it does weigh 6600 pounds, which makes it qualify. also, i always thought that 1000 pounds was a ton. i will double check on that math, because i could swear that is correct. then again, i am a just graphic designer… not a mathmatician.

 

 

Q-1:

Subject: 179 Question

Read the blog page and responses concerning 179.  Searched web can’t find this specific answer:

 

LLC is formed with 2 members.  The LLC is dependent on a machine to generate income.  Member #1 personally purchases a piece of qualifying equipment for $90,000.  The intention is to get the machine into the LLC for liability reasons. Member #1 wants to utilize the full 179 deduction against other personal income rather than a 7 year depreciation period.

 

How can member #1 effective get the 179 deduction to offset other personal income (which far exceeds the cost of the machine) with this personal income having a federal tax liability of about $66,000 for the year.  The logic is that with the 179 deduction of $90,000 about 30% or $27,000 could be deducted from the total tax bill of $66,000.  Not to get hung up on the numbers or percentages with the main thrust being to take the full deduction.  Thus, for example, the machine is ultimately purchased for $90,000 – 27,000 = $63,000 net cost after taxes.  Again, wanting to get the machine into the LLC for business/liability reasons later during the tax year 2006.

 

My CPA is a good guy and very knowledgeable.  Any hints/info I could steer his way when I approach him with this would be appreciated by both of us.

A-1:

LLCs and partnerships don’t have to divide their income and expenses equally among the partners/members.  It is very common to have different percentage allocations for each one.  Usually, it is based on the amount of capital each person has invested; but there are other ways in which to specially allocate income and expenses among the members.  As long as it makes economic sense, IRS will accept it.

In your case, if you are the only one contributing the machine to the LLC, it would make sense to allocate its cost recovery to your capital account via your K-1, as long as that is acceptable to the other members.  Your tax pro should be able to program his tax program to do this.  I have done very similar allocations on 1065s for decades.

Good luck.

Kerry Kerstetter

Q-2:

Thanks for the quick answer.  I understand what you are indicating but specifically, can the 179 deduction be taken by the one partner and offset his other personal income.

A-2:

The Sec. 179 can be allocated to a specific partner’s K-1.

Whether you can actually use it all on your 1040 will depend on the level of earned income you are reporting on the 1040.

Kerry Kerstetter

Follow-up:

Thanks again.  I appreciate your dedication to people and their questions!

 

Q:

Subject: Section 179 and taking delivery

Hi Mr. Ketstetter;

 

I am looking to buy a qualifying peice of equipment per Section 179 and I was told it may not get delivered (and put into service) until 1/2006.   Can I still take the 179 deduction in 2005 if I only purchase the equipment and not take delivery?

 

Thanks.

A:

No, you may not claim the Section 179 or any depreciation expense on your 2005 tax return for an asset that is not placed into service in 2005.  The law is very explicit on this point.

You really should be working with a tax pro who can help you with basic issues such as this.

Kerry Kerstetter