Q:

Subject: Re: sec 179=100% vehicle deduction for 100% business use.

Dear Sir,

I read your free service in your web site and I heard about your good reputable name and appreciate if you can kindly advice me.

 

I recently become a realtor(self employed) and my income source is comission.Recently got a good comission for closing some properties.I plan to buy a car soley for my realtor business.I do have another car for my personal use.

 

Questions:-

 

If I buy a new car for $25,000 in dec 2005,can I deduct all the $25,000 under sec 179 or do I have to prorate the deduction since I purchase the car in dec 2005?

Must I pay all cash in order to deduct the 25,000 under sec 179?

Is there a specific type of vehicle that i need to buy before I am eligible for the full deduction of $25,000?

 

Can I buy the vehicle under my personal name since I am a realtor and my realtor comission received is under my name.?

 

Looking forward to experience your good advice.

Thank you very much

 

Regards,

A:

None of the info I post on any of our websites, nor emails such as this, are intended to replace the personal services of a competent tax pro, who can more accurately evaluate your personal situation.  Any good tax pro should be able to help you save many times more in taxes than his/her fees, as well as help you stay out of trouble with the tax authorities.

Any competent tax pro can easily answer the questions you raised. I have also previously discussed them at more length on my blog and main website.

The full Section 179 deduction is available regardless of when in the tax year the asset was acquired and placed into service.  The last week of the year is a very popular time for people to shop for SUVs and other heavy vehicles.

The Section 179 deduction is the same regardless of how the vehicle is financed.  You can claim the same amount whether you pay all cash or finance the entire price.

The $25,000 deduction is only available for SUVs or cars weighing more than 6,000 pounds.  Passenger vehicles weighing less than that are eligible for a lower Section 179 amount.  Trucks and utility vehicles over 6,000 pounds are eligible for up to $105,000 of Section 179 deduction.

If you are not incorporated, the name on the title of the vehicle isn’t relevant for tax deduction purposes.  I t can be either your own name or that of your unincorporated business.  What is critical is how it is being used, measured by miles driven.

I have a lot of info on Section 179 on my main website.

As I said, I have also covered all of these issues in much more detail on my blog.

Go there and do a search under 179 and you will find dozens of postings.

Again, don’t actually implement any tax motivated action until you have consulted with a tax pro who you actually pay for advice.  Free advice, even from me, is worth just that.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry Kerstetter,

Thank you very much for your excellent advice and links.

 

Have a blessed thanksgivings

 

 

Q:

Subject: Equipment Deduction

Dear sir,

 

I have a friend who has a paiting business. He wants to know his options for deducting the cost for the purchase of all of his paiting equipment on the year’s tax return, 2004. He knows there is a rule that says he can take the entire cost this year if he wants to do so (I think section 179). He said that he made a small amount of money in 2004 and probably won’t have to pay much tax. What would he should do in this situation.

 

Thank you very much.

 

Regards

A:

I have extensive info on the Section 179 deduction on my website.

Your friend needs to be working directly with a tax pro who can help him set up a strategy that will work best for his particular situation and not obtaining advice second-hand from you.

Kerry Kerstetter

 

I have noticed some tax guides that do erroneously show the maximum Section 179 deduction dropping to $25,000 after this year; so this email wasn’t unexpected.

Q:

Subject: section 179 for assets purchased in 2006

 

Hello,

 

Sorry to bother you. We were completing some tax planing and I noticed on taxguru.org that there is a section 179 deduction schedule that shows $108,000 and 108,000 + COLA for years 2006 and 2007. I can’t seem to find any support for that on www.irs.gov. My understanding was that 2005 was the last year for increased maximum deduction.

 

Could you provide me with an irs link that supports the section 179 deduction amounts for 2006 and 2007?

 

Thank you,

A:

If you download the IRS’s recent announcement for 2006 inflation adjusted figures  that I mentioned on my blog, you will find the following on Page 13 of that pdf file:

.18 Election to Expense Certain Depreciable Assets. For taxable years beginning in
2006, under § 179(b)(1) the aggregate cost of any § 179 property a taxpayer may elect
to treat as an expense shall not exceed $108,000. Under § 179(b)(2) the $108,000
limitation shall be reduced (but not below zero) by the amount by which the cost of
§ 179 property placed in service during the 2006 taxable year exceeds $430,000.

I hope this helps.

Kerry Kerstetter

Q:

Subject: 179 on Motor-home

 

Can I take section 179 on a motorhome I am purchasing for my business even though I have taken 179 on previous assets in prior tax years.   Is it a lifetime max of 100K or each year max?

 

Also,  Can I further depreciate the motorhome over a period of 3 years for the difference in the 179 deduction and the purchase price of $270,000?

 

What other write-offs can I take (i.e. interest, gas, repairs)?

 

Many Thanks,

A:

Each year, you start off with a fresh eligibility for the Section 179 deduction.  What you claimed on the previous year’s tax return doesn’t affect this year’s deduction.  Many business owners actually budget their business equipment purchases accordingly, spreading them out over multiple years in order to be able to claim the maximum each year. 

Assuming that your motorhome will be used 100% for business, and the total of Section 179 assets that you acquired during the year is less than the statutory limit ($420,000 for 2005) you can claim Sec. 179 on the motorhome and then depreciate the remainder of the cost over five years. 

If the motorhome is being used 100% for business, all related expenses for it (fuel, insurance, repairs, license, storage, washing, etc) would be deducted on the same schedule as where you are claiming the Section 179 and depreciation.

If the motorhome is being used less than 100% for business, you will need to prorate all of the costs, including Section 179, to only deduct the business percentage.  Of course, if the business usage is less than 50%, it is not eligible for any Section 179 deduction.

If you are serious about properly managing your business, you must be working one on one with a tax pro and not just relying on tidbits of tax info that you come across on the internet.

Good luck.

Kerry Kerstetter

 

 I have a large number of items in my “To Be Posted” folder.  This was from March 2005. 

Q-1:

Subject: Section 179 as an LLC Partner

 

Dear Ms. Kerstetter,

 

Nobody can seem to answer my question.  I am an equal partner of a 3 member LLC (taxed as a partnership).  I purchased a large SUV (over 6000 lbs) in August, 2004.  I made this purchase with my own money primarily for my business activities on a daily basis, but figured it would be a good vehicle to have for certain personal usage (family vacation).  My question is this:

 

Can I deduct the 84% usage on this vehicle as a Section 179 deduction?  If so, where do I make this deduction (what form)?  Do I simply adjust line 17 on the 1040 or must I make this deduction on another line?

 

Any help would be greatly appreciated,

A-1:

Unreimbursed expenses that you pay on behalf of your LLC, including Section 179 and other vehicle costs, can be claimed on Page 2 of Schedule E on a line right under where the LLC K-1 info is shown.

This has long been a very basic part of tax return preparation.  If your personal tax advisor was unaware of this, it may be time to look for someone with a better understanding of how to handle pass-through entities.

I hope this helps.  Good luck.

Kerry Kerstetter

Q-2:

Thank you very much Kerry for your answer.  I assume you were referring to Schedule E, Page 2, Line 28 (i) under Section 179 expense deduction from Form 4562.  So even though I would list my LLC’s name, I would go ahead and list the K-1 info as well as my own section 179 deduction on the same line? That’s where the confusion lies and why no tax preparer (and I’ve asked plenty) here can seem to give me a straight answer.  Some say that Unreimbursed expenses must fall under the condition:  To be deductible, the partnership agreement must state in writing that the partner pay the expenses.

The problem is that I purchased this Large SUV at my own discretion, as I felt it would make my job easier as well as come in handy for the rare trips my wife and I make.  Under these conditions, can I still claim this, even if it’s not in the partnership agreement?

Thank you so much for helping me out,

A-2:

I’m not sure why this is so confusing to tax pros.  For as long as I can remember, my tax software has had an option to code business expenses, including depreciation and Section 179, to a K-1 activity.  It then prepares the appropriate backup schedules, including the 4562 for depreciation and Sec. 179, and prints the total on page 2 of the Sch. E, on a separate line under the info from the K-1. 

You don’t have to put everything on the same line.  As I mentioned in an earlier post on my blog, if there are more K-1s than blank lines on the Sch. E, the program prints “See Attached” and has a backup schedule listing all of the individual K-1 and expense items.  I have had clients with 30 or 40 K-1s, so such backup lists are quite common.

IRS has never had any problems with reporting it like this, and I have prepared thousands of them.

Kerry Kerstetter

Q-3:

I just got back from visiting with another CPA.  She also said that anything declared as a Section 179 on the Schedule E must come from a K-1.  How can I do this if I purchased my SUV with my own money.  All I want to do is deduct 84% of the cost of my SUV, since that is what I use for business.  If I list it on line B, of Schedule E, Page2, line 28, What do I put as the name of that Section 179 deduction since I have no sole proprietorship or other business that made the SUV purchase for me?  Please help.  Do you do taxes for people in Nevada?

Thanks Again,

A-3:

As I said before, my tax software has always allowed me to show Section 179 property purchased by individuals for partnership & LLC business on Page 2 of Sch. E; and IRS has never complained; so I’m not sure why that CPA said that.  She probably just didn’t try it.

If you’re doing your return by hand, I guess you could include the 4562 and carry the numbers to page 2 of Sch. E.  Write in that they were for the LLC activity.

We do have clients all over the country, including several in the Vegas area.  Unfortunately, we are over-extended and are dropping clients in order to balance out the workload with my capacity.

Kerry Kerstetter

Q-4:

Kerry,

Thank you so much for all your help and responses in this matter.  You’re doing a very nice thing in taking time out of your busy schedule to help out people such as myself.  I actually found a tax preparer today who suggested that I can use Form C and just not enter the business name, just in order to get the software to list my Section 179 deduction under my K-1 info.  This way, it will decrease my adjusted gross income like it should.  However, I’m gonna suggest your way better, as I know that the Section C is only for Sole Proprietorships.  I guess in a way, it’s the same thing.  I still wish you could do my taxes over the phone, as I have already done everything else. The only thing I needed was to complete that Section 179 writeoff.  A whole lot of preparers here in Vegas could learn from you.  Anyhow, I’ll have that prepare do it for me just to give me some peace of mind, as I want it done via a tax program rather than by hand.

Again, thank you so much for all your help.  My wife and I are very grateful to you.

Regards,

A-4:

That Schedule C idea is dangerous.  I recently finished resolving an IRS audit case for a client whose original preparer did just that, putting her personally paid K-1 expenses on Sch. C instead of on Page 2 of the Sch. E.

Good luck.

Kerry

 

Q:

Subject: lease

On your site under the Section 179 & Leases, you mention that capital leases are “disguised purchases” and using a $1 buy-out that section 179 would be allowed to be taken in the first year.  Are you also saying that in addition to taking the 179 deduction/savings you can take advantage of the leasing tax advantages as well, even though it is not truly a lease (FMV etc).? Thanks

A:

If by the “leasing tax advantage” you mean deducting the monthly lease payments, that is not possible if you have chosen to treat the acquisition as a purchase.  Under that scenario, you would set the asset up on your books at its purchase price, along with a liability for the principal portion of the future lease payments.  Each month, you can deduct the interest portion of the payments to the leasing company; but not the principal portion.  That is already being deducted via depreciation and Section 179.  You can’t double-deduct the same expenditures.

This isn’t a complicated issue.  You should be working with a competent tax pro who can better advise on how this fits your particular situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you very much!!

 

 

Katrina Emergency Tax Relief Act of 2005 – Good summary from QuickFinders of the new law that was just signed by Bush.

Withholding Required on Certain U.S. Real Property Transactions Involving Foreign Persons, IRS Warns – This isn’t a new requirement; but it appears that some people are forgetting to do their duty in reporting these sales to IRS and sending them the 10 percent of the sales price that is intended to motivate foreign sellers to file USA tax returns. Using options and contracts to control real estate is not a legal way around this requirement.

Hitting a Profit ‘Sweet Spot’ From Property Flipping – More developers are including restrictions in their sales contracts, requiring buyers to either hold onto the property for a minimum amount of time and/or share their resale profits.

The Feds bust some Florida tax scammers who used a variety of idiotic strategies to help their clients cheat the government.  – Is this another slam at the intelligence of Floridians?  Only blooming idiots would fall for these screwy ideas.

Three Signs Your Blog May Attract Buyers – Some obviously big pros and cons to selling out to bigger companies. 
FYI: This blog will never be for sale because no amount of censorship or control can be tolerated. Of course, as I’ve long said, I am curious how strong my principles of independence would be in the face of very big money offers.  Namely, is there an amount of money high enough to break my resistance?  I have turned down dozens of potentially very lucrative kickback offers over the decades to endorse questionable investments.  Would I be willing to decline a million dollar cash offer to sell out this blog?

CCH has computed the inflation adjusted individual income tax brackets for 2006.

Besides the new income tax brackets and standard deductions, there are some other upward adjustments of note.

Maximum Section 179 deduction rises to $108,000 for 2006

The annual amount of gifts that are exempt from gift tax increases from the current $11,000 per year to $12,000 per year as of 1/1/06.

Q:

Subject: Section 179 expense

I don’t know if you can help me or not but I am trying to analyze tax returns for a borrower who has an S Corp and on his Sch E there is income loss under the Section 179 heading is this income that I should be able to use when qualifying my borrower or is this truly a deduction like when Sch C people write off expenses?  I would appreciate any assistance you could give me.  Thank you.

A:

As pass-through entities, S corps are taxed very similarly to sole proprietor Schedule C, as part of the owners’ 1040.  Section 179 expense for new business equipment purchases is required to be shown on a separate line from the other net income or loss from the S corp because it has its own limitation on the 1040 based on the Section 179 deductions from other K-1s, as well as directly from Schedules C, E and F on the 1040.

I know that different lenders have different policies in regard to using a borrower’s  AGI for loan qualification purposes.  Some lenders use the reported AGI with no adjustments of any kind allowed.  Others do allow an add-back for some kinds of quasi-personal expenses that were run through the business schedule for tax purposes. 

Normally, the Section 179 deduction wouldn’t (and definitely shouldn’t) be one of those adjustments.  There may be other quasi-personal expenses buried in the S corp’s net bottom line.  You should ask your borrower and his/her tax preparer for details on those kinds of things if you are so inclined to make that kind of adjustment. 

Just adding back the Section 179 would not be appropriate unless your borrower confesses to running personal use assets through his/her business.  In that case, you may also want to factor in possible future IRS tax or fraud charges, since they are currently putting S corps under their microscope as I explained in a recent blog posting.

I hope this helps.

Kerry Kerstetter

 Follow-up:

Thank you very much and this helps greatly. 

Many employers use the IRS’s official rate for vehicle costs for reimbursements to their employees.  With the steep rise in fuel costs this year, it is obvious that the IRS’s current 2005 rate of 40.5 cents per business mile, which they actually established last November, is behind the times.

According to this article about Arkansas government employees, they have been paid 37 cents per mile driven for work purposes, and will now have it raised to 39 cents. 

Historically, when there is a huge increase in the cost of fuel, the IRS big-wigs takes take their time to see if it is a fluke or something that will last for a while. Since everything I have seen indicates that $3.00 per gallon will soon be the norm, I am betting that there will be a mid-year change in the IRS’s official rate for 2005.  The last time they did this was in 1999, with a reduction in the standard rate as of 4/1/99 from 32.5 cents per mile down to 31.0 cents.  This year’s change will probably be effective as of October 1, 2005. 

As always, this kind of situation points out the importance of keeping records of your actual operating costs so that, at tax time, your preparer can use them to deduct the higher of the standard rate or pro-rated actual costs.  Of course, some vehicles, such as those that used Section 179, don’t have the option of which method to use.  They must stick with the actual costs.