Q:

Subject: Section 179 for SUV Valid for Child Care Business?

Hi Kerry,

I’ve been reading your blog with great interest and have almost  gotten the answer I need, specifically around section 179 deduction  for a 6000lb or greater SUV in 2004.

The only open question I had was if a Child Care business qualifies  for this vehicle deduction. My wife decided to start a child care  business last year and we purchase an SUV so she could have a very  safe vehicle for her business. After a couple of months of finding  the right family, she started taking care of 3 children and has been  with the family ever since. The SUV is mainly (more than 80%) used by  her to travel to and from our home to the family’s home, pick up the children from school and take them to various other activities. In my  view, the SUV is an integral part of this business and I wondered if  we can deduct the cost of the car as a Section 179 expense against  the child care business.

Thank you so much for your answer.

A:

As always, anyone with a business should be working with a tax pro to legally minimize your taxes and to see how simple matters like Section 179 apply to you. 

Equipment purchased for a child care business is just as eligible for the Section 179 deduction as for any other kind of business.  The same restrictions apply, such as the taxable income limitation and the requirement that the item be used more than 50% for business. 

This second point is one that you and your wife will need to work on with your own personal tax advisor.  Specifically, the wording of your question makes me wonder where her business is located for tax purposes.  If the kids are brought back to your home to be taken care of, then all miles related to that would count as business related.  If, on the other  hand, all of her work is done at the parents’ homes, there could be a problem counting the drive back and forth from your home as business miles and not as nondeductible commuting. 

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Kerry,

thank you very much for your answers. You answered exactly what I  needed to know and also thanks for making me aware of the commuting  miles.

It’s really great to have your site.

 

Q:

Subject: Section 179

 Dear Kerry,

 I wanted to inquire as to your fee to get a determination on the following tax issue:

 

I purchased an SUV for my business in Dec 2002 and took the sec .179, (24k) plus 1st year accelerated depn (approx 7k).

 

Traded it in Sept of 2003. for another that was 7,000 more and reported a like kind exchange

 

Now, Aug 2005, I want to trade it for a station wagon. (non qualifying under sec 179). Value of the trade is about 31,000 and the new car is about 60,000.

 

What are the recapture issues. When will it not matter, etc.

 

Thank you,

A:

While the new station wagon may not qualify for the huge Section 179 deduction that vehicles over 6,000 pounds do, it does qualify as a like kind asset for an exchange from your current SUV. 

Since you are trading up and not receiving any cash out of this transaction, the only way any Section 179 recapture would kick in is if the new vehicle is used less than 50% for business purposes before December 2007 (five years after the original SUV was purchased).  If that happens, a pro-rated recapture would be required.

If that’s a possibility, you should work with your personal tax pro to see how much that would cost you in actual tax dollars.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Question regarding C corp Taxation…

Hi Mr. Kerstetter,

I love your website and appreciate your frank opinion on all topics. I am a CSU Hayward grad as well, Year 2001. I wanted understand more about tax benefits on C corps, I am starting a business franchising Pizza from PapaJohn’s in the east bay area. My family also owns a farming operation of Almonds. I have created 2 corporations and will be handling the books for both. Couple of questions that come to mind are:

– If I do not distribute any profits from any of the corporations, do I still have to pay taxes?
– Can I use the un-distributed income from a corporation towards buying more land and not pay any taxes on that income?
– If i show a loss on my corporation, is that perfectly ok and there is no limit to number of years I can do that for?
– Finally, I have read on 179 but still not very clear that what can I write off? Can you give me specific examples of types of writeoffs people do?
– If I buy a vehicle for pizza business and use that heavily what are my write-offs on that?

I hope you can answer these questions, I have been long searching for answers and validation on these but never found a straight answer.

Final question is about, if we had to hire you a s tax advisor and accountant for filling our taxes, what would that cost us?

Thanks

A:

You do really need to be working with a tax pro who can assist you with these kinds of things.  I wish we could help you; but we already have too many clients to take care of; so we are not accepting any new ones at this time. In fact, we are actually still cutting back on clients, trying to find the right balance of workload, so that I’m not so backlogged with projects.  I have no idea how long that will take.

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.

Your questions here are all extremely basic.  So, for the benefit of my readers, I will cover them briefly.

Distributing corp profits – With an S corp, there is no difference whether the profits are paid out to the shareholders or not.  With a C corp, if you don’t bleed out the profits by making deductible payments, the tax rate can get pretty expensive at the corporate level.

Buying land won’t do anything to reduce the corp’s taxable income.

Corporate net operating losses can currently be carried forward up to 20 years.  This rule is changed occasionally by our rulers in DC.

I have a ton of info on Section 179 on my website.

How to handle vehicle expenses depends on who owns the vehicle (you personally or the corp), as well as the percentage of miles driven for business versus personal.  Any competent tax pro should be able to give you more specifics for your situation.  

Good luck.

Kerry Kerstetter

 

Q:

Subject: C Corp and LLC

I saw some of your research online and have a quick question.  

Here is my situation.   I currently have 2 LLC’s operating as partnerships.   We are considering making 1 a C Corp in order to take advantage of 15% tax bracket.   There are other benefits of making one a C Corp as well.  If we make 1 a C Corp, can we take a full 179 deduction at the C Corp and again at the partnership level?   Essentially we would be getting the 179 deduction doubled, once inside the C and once at the member level of the LLC?   I cannot find any IRS ruling or anything relating to this.   Any help would be greatly appreciated.

Thanks,

A:

In a way, you almost make it sound as if you would be claiming two Section 179 deductions on the same assets. 

What I have long been trying to explain as a big benefit of using C corps is the fact that they are eligible for their own full Section 179 allowance and the shareholders are also eligible for their own full allowance on their 1040s.  This does double the overall potential Section 179 deduction for single owner C corps.  The potential multiplier would be more for multi-owner C corps. 

This is why it is important to divide new business asset purchases between those made in the corp name and in the name of the shareholder or other entity (partnership or S corp).

I discussed this on my main website in a number of places:

http://www.taxguru.org/incometax/Rates/Sec179.htm

http://www.taxguru.org/corps/scorp.htm

Good luck.  I hope this helps.

Kerry Kerstetter

 

Q:

Quick question for you..I want to buy two rv’s and start an rv rental business..can I immediately expense the full cost of both rv’s on my 2005 taxes and reduce my taxable income. I had read where there was a limit in the deduction that says if the business makes 25K that’s all you can write off..not the 105K.. Thank you kindly…

A:

It’s impossible for me or anyone to know how much, if any, you will be able to claim for Section 179 without looking at various factors, including the level and type of other taxable income, as well as th total cost of new Section 179 assets you have purchased during the tax year.

While I have covered these points in a very general sense on my website, that is not in any way intended to replace the use of a qualified tax professional.

Good luck.

Kerry Kerstetter

Q:

Subject: Sec. 179

 

Hello Kerry Kerstetter,

Have a question for you. Forgive my lack of knowledge, but for a small family owned C corp, what exactly falls under Section 179?

Can I classify new office computers purchased/financed? Company car (under 6K lbs) financed? Office renovations such as new carpet, paint, etc.?

A:

I have posted extensive info on what qualifies for Section 179 on my website.

You really need to be working with a tax pro for this kind of thing.  Operating a business without a competent professional tax advisor is just asking for trouble.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Quick question on buying a SUV for business in 2005.

Kerry,

First of all, finding your website is probably the best thing I’ve done online this year. Thanks for all the great information and I wish every CPA could have the same attitude and knowledge.

May I ask a quick question about Sec 179? I started a retail business this year and it is doing good so far. I am planning to buy a SUV, which will be used at least 60% for business. I understand that the 100K deduction expired. Does that mean the tax impact will now be the same no matter whether the SUV is above 6K lbs (e.g. A VW toureg) or below? How much deduction should I expect for it? (vehicle will be priced between 30K~40K)

Thanks for your help in advance.

Have a wonderful day.

A:

As I always say, you really need to be working with a tax pro to see how the tax laws and rules will affect your particular situation.

If you check my page on Section 179,  you will see that the maximum for 2005 is $105,000.  Of that, only $25,000 can be for SUVs that are over 6,000 pounds GVW. 

The maximum for vehicles under 6,000 pounds is much lower than that.  For  example, SUVs, trucks and vans weighing less than 6,000 pounds that are placed in service in 2005 have a maximum Sec. 179 deduction of $3,260 if they are used 100% for business.  Thus, the 6,000 pound threshold is still very important.

In your example, using an SUV weighing more than 6,000 that costs $35,000 and is used 60% for business, you would have a possible Section 179 deduction of $21,000 ($35,000 X 60%).  This could be limited based on the other restrictions related to Section 179.

Again, any competent tax pro should be able to help you with this in more detail than the generalities we are using here.  

Good luck.

Kerry

Follow-Up:

Thank you so much for your reply. You are just awesome.

I will definitely hire a CPA for the actual tax/accounting stuff,

But your answer helped me to save time on researching target vehicles, which is just as valuable.

Thanks again and you have a good evening.

 

Q:

Subject: May I ask you a quick tax question about section 179?

 

Please advise me on your thoughts regarding the purchase of a new business telephone system and being able to utilize section 179 for a tax break on this purchase.  We are debating at our company on whether you can write off some of the purchase expenses or not…I thought I would ask an expert.

Thanks,

A:

While buying a new phone system would possibly be eligible for Section 179 expensing, whether you can or cannot actually claim it depends on various other factors. 

These include:

The total cost of new equipment placed into service during the tax year; i.e. $420,000 for 2005

Whether there is a net profit for the year, because Section 179 can’t create or add to a net loss. 

You really need to be working with a tax pro who can analyze your figures and give you advice based on your actual numbers.

Good luck. 

Kerry Kerstetter

 

Q:

Subject: Section 179 expensing

I find your blog to be very informative.

 

Would you please explain to me how a C corp is able to deduct its own 179 expenses in addition to what is claimed on the 1040s of the owners?

 

Your response would be most appreciated.

A:

This is covered in my article on the differences between C and S corps:
http://taxguru.org/corps/scorp.htm

Kerry Kerstetter

Q:

Subject: Your Service

I have a couple of questions about Section 179 and therefore I would like to engage your services; how do I do that.

 

My questions are:

In a rental property I own, I put in a new washer and dryer.  Is that a 179 item and if so specifically where do I make the entries on the tax return?

 

I manage my own rental and obviously actively participate and I am interested in understanding the “up to $25,000 in losses”  Part of what I am trying to determine is can any of the rental loss offset regular income?

 

I would appreciate hearing from you as soon as possible.

A:

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. In fact, we are actually still cutting back on clients, trying to find the right balance of workload, so that I’m not so backlogged with projects.  I have no idea how long that will take.

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.

Both of your questions are very simple and any experienced tax pro should be able to help you with them. 

As is included under the heading of “Nonqualifying Property” for Section 179 on my website is “Property used in connection with furnishing lodging.”  Thus the washer and dryer may not be expensed, but must be depreciated over their appropriate class lives.

The issue of active participation in a rental property has been around since 1986; so any qualified tax pro should be able to discuss whether or not your personal involvement is enough to qualify for the $25,000 net deductible rental loss.

Good luck.

Kerry Kerstetter