Q:

Hello Guru!

I am in a bit of a dispute with my CPA regarding the 179 deduction for a huge 6000 pound  Range Rover. 

I am considering making this purchase of this huge vehicle due to a huge tax burden that has fallen at my doorstep due to a very good year.  I have a Sub Chapter S corporation in which I own all stock.  Is it necessary that the automobile be titled in the corporate name or can it be titled to me personally?  I get a much lower interest rate personally than the banks are offering for the corporation.

Any comments would be greatly appreciated.

A:

With an S corp, the actual Section 179 deduction will end up on your 1040 either way.

However, to be technically correct, you need to show the actual asset on the books of the entity which has its name on the vehicle’s title.  If you register it in the corp’s name, you will show it on the 1120S as a corp asset.  The Sec. 179 deduction will flow through via K-1 to Page 2 of Sch. E on your 1040.

If you register it in your personal name, you will show it on your 1040.  This then brings up a big difference on how you can deduct the SUV’s costs if you own it personally.  If you set it up as a rental asset on Schedule C or Page 1 of Schedule E of your 1040, you can claim the business related expenses, including Sec. 179, on that schedule. You would need to show rent income for it which would be by leasing it to your corp.  

If you just show its costs as unreimbursed employee expenses, those will have to be reported under the Miscellaneous Deductions section of your Schedule A.

Bottom-line, claiming it on Sch. A will save you much less in taxes than if you claim it on Schedule C or E because anything that reduces your AGI has much more bang for the buck than personal Sch. A deductions.  It is also a fact that high Sch. A Miscellaneous Deductions will  often trigger the infamous AMT (alternative minimum tax), while those exact same amounts won’t trigger AMT when reported on Sch. C or E.

While these comments should help you decide on the best strategy for your situation, you should also consider the issue of liability.  Many people prefer to title their vehicles in the name of their corps so that any potential lawsuit caused by them would be less likely to jeopardize other personally owned assets.

Good luck.

Kerry Kerstetter

As with any new tax law, the result is confusion among the public and the professional tax practitioner community, such as in this email I recently received.

I just ran across your website.  Can I ask you a question? 
 
I just purchased a Ford F350 Super Duty Diesel Truck.  The price was $29,000.  Can I deduct the whole amount on SEC 179 for this tax year?  My CPA said it has to weigh over 14,000 lbs.  Does that count for vehicles that are not SUVs? 
 
Thanks.

My reply:

The new law restricting the Section 179 deduction to $25,000 and setting a new weight limit of 14,000 pounds for a higher deduction, only applies to SUVs.

I posted the actual text of the new law spelling this out on my blog a few months back:
http://www.taxguru.net/2004/10/wait-is-over.html

You should pass this along to your CPA.

Kerry Kerstetter

I recently received this email from a very perceptive reader:

Great articles

Suggestion:  “their different businesses”  did you their different corporation.  A corporation may have various DBAs or business but only qualifies for 1 section 179 expense election.  Keep up the good work. 

More Deductions

As I have described elsewhere, the Section 179 expensing election is much more lucrative for owners of C corporations because they can literally multiply their total deduction by splitting their purchases of business assets among their different businesses.  With an S corp, the Section 179 deduction is limited to just the one amount.  Likewise, the deduction for net rental losses is magnified by using a C corp because it can use rental losses to offset all operating income.   An S corp’s rental losses are subject to the restrictive passive loss rules.

 My response:

That is an excellent point.  I should have referred to different “business entities” (1040 Sole Proprietorships vs. 1120 Corporations) instead of the less descriptive different “businesses” because a single 1040 or 1120 could each contain several different and distinct businesses and the Section 179 deduction is limited to a total of $102,000 for the entire 1040 and $102,000 for the total 1120, along with similarly controlled 1120s (a related topic I will probably be discussing soon).  I also appreciate your copying & pasting the text from my site.  That made it easier for me to go in and make the correction. 

Thank you very much for your comments and please continue to point out examples that you notice where I may have said something  in a confusing or otherwise less than precise manner.  The last thing the tax game needs is more confusion.

Kerry Kerstetter

Q:

Hello Mr Kerry M. Kerstetter,
 
My name is T***y and and I would like to thank you for the wonderful advice/information you have on your website. I have two questions if you can answer for me:
 
I am an independent contractor with no employees, 34 yrs old, have an LLC, and am thinking of setting a 419 plan- Do you recommend this.  I plan to put 41k in SEP, 3k in IRA, and rest in 419. If this is not a good plan, what other vehicles are there to save more of your income?
 
Second Question) I plan to purchase a vehicle but do not want to purchase 6000lb one. If I purchase a luxury car @ $45k is there a benefit to purchase one this year vs next year. I have heard this is the last year where one can deduct 10k and next year it will be only 3-4k. Does the vehicle have to be new, or can I purchase an old one like 2002/2003 with 18k miles?
 
Thanks

A:

T***y:

I can’t advise you on the various retirement plan options in this format.  You need to work one on one with a professional tax and/or financial advisor for that.

In regard to the issue of buying a new business vehicle, there are some big differences.  The approximately $10,000 of first year bonus depreciation is only available for brand new (not used) vehicles and this will not be available in 2005 because it was not renewed by our rulers in DC. 

The other Section 179 and regular depreciation deductions are the same for used and brand new vehicles, as long as it is new to you.

I’ve discussed other various aspects of this in numerous recent postings.

Good luck.

Kerry Kerstetter

There is a lot of confusion over the reason for the importance of the requirement for a business vehicle to weigh more than 6,000 pounds for maximum tax deductions.  I’ll give another very short history of this.

Back in 1984, our rulers in DC instigated severe limits on the cost of business vehicles that could be depreciated.  It was called the “Luxury Car Rule,” which is still in place today, with slightly higher dollar amounts.  Before that time, vehicles could be depreciated over three years with no dollar limit.  This had to be capped because so many people shot their mouths off about this great tax break and those who weren’t using it became so resentful that they pressured Congress to trim it back. 

This is just one classic example of why, if you are benefiting from a certain tax break, you should be happy about that, but keep it to yourself.  Other people do not like hearing about your tax breaks and will make it their mission to deprive you of it; which is what just recently happened with the $25,000 limit for Section 179 on SUVs.  That was a direct backlash from environmental wackos, SUV haters, along with people who resent the fact that business vehicles are tax deductible, while personal ones are not.

At that time, in 1984, there was debate over how to distinguish between a normal passenger vehicle and a more utilitarian utility vehicle, which were normally trucks and vans.  The line was set at 6,000 pounds GVW.  Any vehicle weighing more than that was not subject to the luxury car limits and could be depreciated fully over five years.  It was also extended in interpretations of how to claim the Section 179 expensing election for business equipment. 

While many people, including a lot of tax practitioners, only discovered this rule a short while ago, when the Section 179 limit was raised from $24,000 to $100,000, it has been around for more than twenty years, and has been a part of my seminars, speeches and articles all of that time.       

Business vehicles weighing less than 6,000 pounds do qualify for a Section 179 deduction, but a much smaller amount than the heavier ones.  There are also much lower annual depreciation limits.  

For 2004, brand new business vehicles of any weight may also qualify for the special bonus depreciation; so it’s not true that lighter vehicles receive no tax breaks.  They just generate much lower tax breaks than do vehicles weighing more than three tons.

Q:

Miss Kerstetter,

Let me start off by asking if you provide accounting services?  I am based in Hot Springs.

I found your information on the recent changes to section 179 in relation to vehicle purchases very helpful.  I would like to ask if you could provide additional information about vehicle purchases under section 179.  I understand that the deduction is limited to $25,000 after October 22 2004 and that the vehicle should be used more than 50% for business.

I am considering purchasing a business truck for trips to UPS, the bank and post office.  More than 50% of the mileage will be for business usage however I expect to put 5K or less miles per year on the vehicle. 
With it being December already I may not put more than 500 miles on the vehicle.  In order to get the best price I may purchase the vehicle from a dealer several hundred miles away.

This raises two questions

1. Is there any minimum mileage required for section 179?

2  Can mileage between the dealership and home office when picking up the vehicle be counted as business mileage?

Thank you in advance for your advice!

A:

There are no minimum number of miles required by IRS to qualify for the Sec. 179 deduction.  There just have to be some miles driven, which need to be allocated on a percentage basis between business and personal.

If the vehicle will be used more than 50% for business in the future, I would consider the trip to pick it up and drive it home to be a business trip.

The $25,000 limit is only for SUVs and is not for trucks.  You can see a lot more info on my website at:
http://www.taxguru.org/incometax/Rates/Sec179.htm

I hope this helps.

Kerry Kerstetter

I am not currently accepting any new CPA clients; but everyone is welcome to check out my latest news & commentaries at: www.TaxGuru.net and the reference materials at www.TaxGuru.org 

Q:

Thank you for your helpful website.
Can you please clarify what qualifies as an “in service” date for Section 179 election and the Bonus Depreciation for 2004?
If software and hardware are delivered to a taxpayer but not installed prior to 1-1-2005, can the taxpayer still take the election for 2004?
Does the existence of a sales order qualify?
Thanks for your help

A:

Placed in service means actually being used before the end of the tax year.  Just having it on hand or on order is not good enough.

From a practical perspective, you do have to wonder how such things can be verified two or three years after the fact

For software, you should be careful to expense the normal recurring purchases, such as the annual QuickBooks or MS Office upgrades in a normal operating expense account.  These don’t need to be capitalized and depreciated or counted against the Section 179 election.

Big customized software or programs expected to be in service for several years do need to be capitalized and depreciated or claimed under Sec. 179.

Your personal tax advisor should be assisting you with this.

Good luck.

Kerry Kerstetter

Q:

If I buy a $25k SUV on december 30th, can I write it off completely?  Or is it prorated based on the calendar year?

A:

The Section 179 deduction has never been pro-rated for normal calendar year taxpayers on their 1040.  The only time I have encountered the need to pro-rate the maximum Sec. 179 deduction is for the first year of a corporation that is less than twelve months long.

In your situation, it is crucial not only to buy the SUV before midnight on 12/31/04; but also to use it for at least 50% for your business by then.  Depending on the cost of the SUV, and its business percentage usage, you could claim as much as $25,000 in Section 179 for it on your 2004 1040.

In addition, if it’s a brand new vehicle, you could also claim the 50% bonus depreciation on the remaining business portion of the cost, after reducing it for the Sec. 179.

Good luck.  I hope this helps.   

Kerry Kerstetter

Q:

I am self employed, I am not incorporated.  Can I still use 179?
 
I do have a business name and am registered with the city.
 
Do I have to get commercial plates or register the truck in my name?

A:

You can claim it on your Schedule C.

The vehicle doesn’t have to be in the business’s name.  It can be in your personal name.  All IRS cares about is how it was used, business vs. personal.

You really do need to work with a tax pro to keep you on the right path.  Unfortunately, I am so far behind with work for existing clients that I can’t accept any new ones at this time.

Good luck.

Kerry Kerstetter

I received this in response to an earlier Q & A.

Kerry,
You used 25% as the recapture tax rate. Is this the case even if the owner’s tax rate is actually lower. Would it not be taxed at the rate of the owner upon sale of the asset?
Thank you.

My response:

While 25% is the maximum Federal tax rate on most depreciation recapture, and what we use for quick and dirty calculations of possible tax effects, the actual effective rate could be lower depending on the other items of income and loss that the taxpayer has on that year’s 1040.  It could even be zero if there are enough losses and deductions of other kinds to offset the recapture income.

This is why it is so important to work with your own professional tax advisor to crunch your real life numbers before undertaking a transaction that could have expensive tax ramifications.

Good luck. I hope this helps.

Kerry Kerstetter

I am working on setting up and customizing the Lacerte organizer for 2004 income tax returns and wanted to discuss the resurrection of a deduction that we haven’t seen since 1986, sales tax.  This was intended to be a fairness remedy for people who live in states without any income tax and are thus supposedly paying more in sales taxes than do people in states with income taxes.  That logic isn’t really accurate, since there are some states with both very high income and sales taxes.  However, it’s close enough for government work, so we do have a new opportunity for Federal income tax savings. 

While the stated intention of this deduction was to benefit those living in tax free states, I have seen nothing forbidding people in taxable states from choosing to deduct sales taxes if they are higher than the state income taxes they have paid for the year, which could very easily be the case for many people.

Before I add my suggestions and advice, here is how QuickFinders described this part of the new tax law:

Deduction of State and Local Sales Taxes

At the election of the taxpayer, an itemized deduction for state and local general sales taxes may be claimed in lieu of the itemized deduction provided under present law for state and local income taxes, effective for 2004 and 2005.

Taxpayers have two options for determining the sales tax deduction. They can deduct the total amount of general state and local sales taxes paid by accumulating receipts showing general sales taxes paid. Or, they can use tables created by the IRS that are “based on average consumption by taxpayers on a state-by-state basis taking into account filing status, number of dependents, adjusted gross income and rates of state and local general sales taxation.” Taxpayers who use the tables can also deduct eligible general sales taxes paid upon the purchase of motor vehicles, boats and other items specified by the IRS.

 

Some additional things to keep in mind.

State tax laws differ as to whether they are consistent with Federal tax law.  Some states automatically just piggyback their tax rules on Federal law, while others require them to pass their own legislation making any changes in their tax laws.  At this late date in 2004, chances are that most of the latter states won’t have time to enact a law authorizing the deduction for sales taxes on their individual income tax returns before the end of the year.  There is a chance that they could pass such legislation in early 2005 and make it retroactive to 2004, something I have seen happen on previous similar occasions. 

IRS tables of sales taxes paid by average consumers are intended to ease the burden of bookkeeping for most people.  They will most likely be used by more people for 2004 than in future years since it was only a month ago that this law was enacted and most people don’t have the time to go back and pick up this info for the first part of the year. 

I have seen some comments on some tax related discussion boards that IRS won’t have the tables out until March 2005.  Even considering IRS’s legendary slowness in doing lots of things, I don’t see them taking that long to issue their official tables.  That would hold up millions of taxpayers, plus the software companies that produce tax return programs, much too far into the normal filing season.  I would expect the tables to be out by the beginning of January, at the latest.

For those folks wise enough to keep their records on QuickBooks or similar accounting software, you should start splitting the posting of personal purchases up between the items bought and the amounts for sales tax.  Set up an Expense account called “Sales Tax” if your chart of accounts doesn’t already have such an account.  If your detailed total for the year is higher than the IRS’s average table, you can claim your higher amount. 

Big unusual purchases.  Those of us who were preparing and filing income tax returns before 1987 will probably remember that it was important to keep track of purchases made during the year of big dollar items, such as vehicles, furniture and jewelry, because those sales tax amounts could be added to the IRS table amounts, which are intended to reflect only the normal day to day purchases.  I noticed that the standard questionnaire included in the 2004 Lacerte organizer only asks about purchases of motor vehicles and boats during 2004.  While IRS hasn’t officially announced what other kinds of big-ticket items can be considered for the additional sales tax deduction, I feel safe in assuming that it will be similar to what we had before 1987.  Back then, any purchases of several thousand dollars at a time qualified.  Besides boats and motor vehicles, those included purchases of furniture, appliances and expensive jewelry.  With some of today’s home theater systems costing over $10,000, I would count those purchases as well.   

Since the way this new deduction has been set up, it gives us an either-or choice between deducting state income or sales tax on a person’s 1040.  I can very easily see this switching back and forth for some people from year to year depending on their big purchases.

Business Purchases – I hope it came across that all of the above discussion was aimed at sales taxes paid on personal non-business related purchases.  Sales taxes paid on the purchases of items used for business purposes are treated differently.  This goes for both the purchases of consumable items which are expensed right away, as well as for capital assets which are depreciated over several years.

I review hundreds of QuickBooks files each year, including those prepared by accounting professionals, as well as by individuals for their own books.  One very common mistake I have often encountered from both kinds of users is the treatment of sales taxes paid.  Rather than include the sales tax as part of the cost of the item being purchased, which is the correct accounting treatment, they post sales taxes to separate expense accounts.  Many use a “Sales Tax” expense account to accumulate sales taxes on normal day to day purchases.  The most common mistake is posting sales tax paid on vehicle purchases to the “Vehicle Expense” account rather than adding it to the cost basis of the vehicle, which is depreciated over its useful life, or expensed under Section 179.

I am constantly having to remind people that deductions claimed on a business schedule (C, E or F) will often result in as much as twice the income tax savings as the same amounts being deducted on Schedule A due to the additional reductions in self employment tax, as well as the ripple effect of reducing adjusted gross income (AGI), since so many deductions, exemptions and credits are reduced based on the AGI.  I mention this once again for anyone who may feel deprived by the requirement to depreciate sales tax paid on a business vehicle over five years rather than being able to expense it all at once on Schedule A.