Tax Guru – Ker$tetter Letter

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Archive for the ‘179’ Category

Sec 179 – Cash Same As Loan

Posted by taxguru on December 30, 2009

These last few days of the year are historically very busy at car dealers, as people try to get their hands on a new business vehicle before New Year’s Day and thus qualify for the lucrative Section 179 deduction, especially for heavier (over 6,000 pounds) vehicles.

Amazingly, there are still a lot of people who believe that the Section 179 deduction is based on the amount of actual cash paid out for the new business equipment, as in this vidcast.  This is just one more of an endless stream of emails from small business owners who think they can handle their own tax affairs. Anyone working with an experienced tax pro would know that the Section 179 deduction is the same whether you pay cash for the full price or take out a loan for the full amount, or use a credit card. 

Likewise, credit card charges as of 12/31/09 are treated the same as 2009 cash payments for tax purposes.  These are almost always missed by taxpayers acting under the misguided assumption that they can come out ahead by avoiding the cost of a professional tax preparer.

 

 

 

Posted in 179 | Comments Off on Sec 179 – Cash Same As Loan

Timing of Sec. 179 Deduction

Posted by taxguru on December 26, 2009

Q:

Subject: Section 179 question

I found your organization via Google, and the information is very helpful!
I own a Dental Laboratory, and want to purchase a $33,000 cad cam system.  My question:  can I take advantage of a year-end purchase incentive by the manufacturer, and have the purchase documents dated December 2009, but take advantage of the section 179 deduction in 2010?  I won’t begin using the new equipment until January.
 
Thank you for your help!

 

A:

You seem to have the opposite situation than most people present; when they want to claim Section 179 in the year prior to actually using the equipment.

If you don’t actually place the new equipment into service until 2010, you shouldn’t have any problem setting it up on your 2010 tax return’s depreciation schedule and claiming Section 179, subject to the other limitations that could affect the actual deduction.

Your own personal professional tax advisor should be able to give you more specific advice on this.

Good-luck.

 Kerry Kerstetter 

 

 

Posted in 179 | Comments Off on Timing of Sec. 179 Deduction

Using Multiple Entities – Vidcast

Posted by taxguru on November 22, 2009

Using multiple entities for tax, liability, and other business reasons has been a very common and useful strategy for longer than I’ve been in this business.  Why many tax pros are unaware or unwilling to recommend them is still surprising to me.

YouTube page

 

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in 179, corp, video | Comments Off on Using Multiple Entities – Vidcast

Sec. 179 On Converted Assets – Vidcast

Posted by taxguru on November 18, 2009

You need to be careful about violating anti-churning rules.

YouTube page.

 

 

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

 

Posted in 179, video | Comments Off on Sec. 179 On Converted Assets – Vidcast

Sec. 179 For Yachts?

Posted by taxguru on November 10, 2009

Another question that really depends on multiple factors.

YouTube page.

 

 

Business Plan Pro 

 

Posted in 179, Vehicles, video | Comments Off on Sec. 179 For Yachts?

Maximum Sec. 179 For Vehicles – VidCast

Posted by taxguru on November 8, 2009

It’s not a cut and dried answer as to the maximum that can be claimed, as I explain in this vidcast Q&A.

If the embedded player doesn’t work, you can access the video directly on YouTube.

 

 

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

 

Posted in 179, Vehicles, video | Comments Off on Maximum Sec. 179 For Vehicles – VidCast

Section 179 For 2010

Posted by taxguru on September 21, 2009

Q:

Subject:  Tax Issue

Is there any information as to what the 179 election and bonus depreciation will be in 2010? Thanks!

A:

This was in the recent CCH report of 2010 tax changes that I mentioned on my blog.

“Code Sec. 179 expensing. Unless Congress intervenes, Code Sec. 179 expensing will return to pre-2008 levels for 2010. For tax years beginning in 2010, the Code Sec. 179 expensing limit will be $134,000 and the cost-of-equipment limit set at $530,000. (Note: Expensing is currently scheduled to return to $25,000 ($200,000) levels in 2011.)”

Nothing was mentioned about any changes in the special first year depreciation, so that will expire as of 1/1/10 for most types of assets, unless our rulers in DC decide to pass another extension.

I hope this helps.

Kerry Kerstetter

Follow-Up:

I like the our rulers in DC comment. Kind of scary, isn’t it! Thanks!

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in 179 | Comments Off on Section 179 For 2010

Limits on Sec 179 For Pass-Through Entities…

Posted by taxguru on September 18, 2009

Q-1:

Subject: LLCs and 179 deduction

Hi Kerry,

I recently did a Google search on Section 179 deductions and LLCs.  Your site came up, but I was unable to find any reference to how LLCs handle the 179 deduction on the site.  Can you point me to the right section?  Basically, I want to know if the 179 deduction flows through the LLC to the members personal returns like other profits and losses do.

Thank you for any help.

Cheers,

 

A-1:

Back in February, I sent you a link to a previous blog post I did on Section 179 deductions with pass through entities.  

Nothing has changed since then.  The Section 179 deduction is one of the separately stated items required to be passed through to the members via their K-1s.  The actual amount of Section 179 deduction each member will be able to deduct on their 1040s may be quite different, based on their unique tax situations.

Your LLC’s professional tax preparer should have software to prepare the 1065 and its K-1s properly, while the members’ professional tax preparers’ software should handle their 1040 Section 179 properly.

I hope this helps.

Kerry Kerstetter

 

Q-2:

Hi Kerry,

Thank you so much for your note of September 6, 2009.  My accountant is adamant that a 179 deduction can only flow through to a single member LLC.  This opinion stands to cost me about $40k and beyond that logically drives me nuts.  Why would the deduction not flow to all the members, particularly in this case where the partners are my wife and I and we file a joint 1040?

Could you point me to something in the IRS or professional literature that clearly (a faint hope on my part) lays out the 179/llc ground rules?

You mentioned that you are thinking of setting up business related Webinars, I’m very interested.  Often those of us doing business are very interested in the deductions that are allowed in the conduct of business depending on the corporate form.  As you can see, from my own very painful situation, it would have helped to know that only single member LLCs can take the 179.

I would be very interested in being kept informed about your webinars and if there is any info on the multiple partner LLC (particularly husband and wife) I would be most appreciative.

Best Regards,

A-2:

There must be some kind of misunderstanding here because what you claim is your accountant’s statement makes absolutely no sense. To claim that only single member LLCs can use Section 179 is ridiculous. I have seen and prepared thousands of tax returns with multiple owners sharing Section 179 deductions.

With a multi-member LLC that is reporting its activity as a partnership on Form 1065 or as an S corp on Form 1120S, the treatment is exactly the same.  Just as the net operating income or loss is divided among the owners on their K-1s based on their ownership percentages, Section 179 deductions are similarly allocated among the members’ K-1s.

If your accountant uses professional software to prepare the 1065 or 1120S, it will handle that allocation automatically.

If your accountant prepares tax returns by hand and doesn’t understand how to properly handle Section 179, it sounds like it may be time to move on to someone with more experience.  If it’s a family member and you don’t want to hurt his/her feelings by switching to a more competent tax pro, only you can decide if that is worth $40,000.

You asked for documentation of this.  How about the official IRS instructions for Form 1065, which you can download here.  

From Page 28:

Line 12. Section 179 Deduction
A partnership can elect to expense part of  the cost of certain property the partnership purchased during the tax year for use in its trade or business or certain rental activities. See Pub. 946 for a definition of what kind of property qualifies for the section 179 expense deduction and the Instructions for Form 4562 for limitations on the amount of

Complete Part I of Form 4562 to figure the partnership’s section 179 expense deduction. The partnership does not claim the deduction itself but instead passes it through to the partners. Attach Form 4562 to Form 1065 and show the total section 179 expense deduction on Schedule K, line 12.

Note that it says “Partners” with an S, meaning that the Section 179 is to be split between all of the partners.

Also from Page 28 is this statement of a limitation on the only kinds of partners who may not claim Section 179 deductions.

Do not complete box 12 of Schedule K-1 for any partner that is an estate or trust; estates and trusts are not eligible for the section 179 expense deduction.

Notice that there is no restriction mentioned regarding multi-member LLCs.

Good luck.  I hope this helps. Fur future reference, when a tax pro presents you with some claim that seems to be wrong on its face, you should demand that s/he present you with documentation to prove his/her point.  I would be very interested in seeing something official that states that multi-member LLCs are not eligible to use Section 179.

If you keep tabs on my blog, we will be announcing the dates of the webinars there.

Kerry Kerstetter

 

Business Plan Pro

 

Posted in 179 | Comments Off on Limits on Sec 179 For Pass-Through Entities…

Double Depreciating Vehicles?

Posted by taxguru on August 3, 2009

Q:

Subject: Question about Section 179 Deduction

I was reading your website and had a question about section 179.

In 2007 I purchased an Expedition EL >6000 lbs. I took the $25,000 deduction, I am being audited and am being told that I can not take the milage deduction and the 179 deduction. I thought the 179 was a depreciation event and had nothing to do with deducting milage. Can you elaborate??

Thanks in advance

A:

I constantly warn people about the dangers of trying to prepare their own tax returns because it is all too easy to make simple mistakes such as the one you did.

With business vehicles, you generally have the option of claiming the IRS’s standard per mile deduction or the prorated actual expenses based on business miles to total miles for the year.

The standard mileage rate includes a factor for straight line depreciation. This was 19 cents per mile for 2007.

The Section 179 expensing election is basically a kind of very accelerated depreciation. If you claim it, you are required to use the actual expense method for that vehicle and you are not allowed to use the standard mileage rate ever for that particular vehicle because that would result in double deducting the same depreciation.

There is no nice way to say this; but you screwed things up big time by trying to deduct both Section 179 and the standard mileage rate on the same vehicle. Any professional tax preparer with even limited experience would know better than to do that.

With that kind of basic error in your tax return, there’s no telling what others you have as well, including many that probably cost you money. Before you go any further with the IRS auditor, you should hire a professional tax advisor to review your 2007 1040 and see if s/he can find some tax saving deductions that will offset the extra taxes that you are going to have to pay as a result of double deducting vehicle depreciation.

If you already prepared your own 2008 1040, you will also need to have a professional tax advisor fix the mistakes that it has.

I’m sorry to be the bearer of such bad news and I hope this helps you salvage some tax savings.

Kerry Kerstetter

Follow-Up:

Thanks for the quick response. The situation is not quite so bad, we found almost $20k in deductions missed.

Thanks again for your help

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

Posted in 179, Vehicles | Comments Off on Double Depreciating Vehicles?

Sec. 179 vs. Standard Mileage Rate

Posted by taxguru on March 19, 2009

Q:

Subject:  Re: section 179

Hi,

Thanks for your previous replies in the past. If you take a section 179 deduction can you still deduct  your businees mileage. O does the section 179 deuction fall under the itemised deductions therefore precluding mileage claims?

thanks

A:

You really need to be working with a professional tax advisor because you are mixing up different tax issues that are technically not connected.

As I have explained on several occasions, if you use Section 179 or any other accelerated method of depreciating a vehicle, you are required to use the actual cost method of calculating deductible vehicle expenses for that particular vehicle for as long as you own it.  You are not allowed to switch to the IRS’s standard per mile rate because that rate includes a portion for deprecation and to switch to it would end up giving you double deductions for deprecation.

The issue of the standard personal deduction versus Schedule A itemized deductions is completely separate from the issue of how the vehicle costs are calculated.  As always, it’s generally a good idea to keep track of all of your actual itemized deductions and use them on Schedule A if they are higher then the standard personal deduction.

I hope this helps; but you need to be working with a tax professional.

Good luck.

Kerry Kerstetter

 

Follow-Up:

Hi,

Thanks a lot.

 

 

Posted in 179, Vehicles | Comments Off on Sec. 179 vs. Standard Mileage Rate