Oops.  With all of the recent changes in the rules and amounts for depreciation and Section 179 deductions, it slipped by me when Kleinrock gave its analysis of the potential deductions for new business SUVs in 2005 that the special 50% bonus depreciation deduction was one thing that our rulers in DC didn’t extend; so it will not be available in 2005. Kleinrock issued a correction in its most recent Federal Tax Bulletin. 

For some reason, I’ve been receiving several emails from people under the impression that the Section 179 deduction has been eliminated or will be as of January 1, 2005.  As you can plainly see on the Section 179 page on my website (which has been updated for the recently enacted new law), nothing could be further from the truth.  Whoever is spreading this myth, please stop it at once.

I can only surmise that the following exchange with an operator of a car dealer website was the product of his wishful thinking.

Q:

Whats the deal on the SUV tax loophole?
 
All the sites I read say it died as of 10/22 but my manufacturer contacts say they have had their attorneys and accountants review and they say its still good until till 12/31/04.
 
Do you know whos right?

A:

The Section 179 tax break for SUVs over 6,000 pounds does not die.

The only change is that for SUVs weighing between 6,000 and 14,000 pounds acquired after 10/22/04, the maximum Sec 179 that can be claimed is $25,000.

The actual total first year depreciation deduction can still be much more than $25,000 when combined with the amounts claimed as bonus and regular depreciation, as I covered earlier in my blog.

Q:

My manufactuer PR contacts dispute that and say their lawyers and accountants have reviewed and the full deduction (100k) is good till 12/31/04.
 
Have you heard that?

A:

Either you are misunderstanding what they are saying or they are not looking at the law properly.

The full maximum Section 179 deduction for 2004 is still $102,000.

The new law addressing how much of that $102,000 may be claimed for the cost of business SUVs was signed and enacted by President Bush on October 22.  The law clearly states that the new limit takes effect the day after enactment.  Thus, any SUV acquired after October 22, 2004 is subject to the new lower Section 179 limit of $25,000.

I have read literally hundreds of articles and discussions on this very topic over the past several months, and not a single one mentions an effective date of January 1, 2005.  Your recent email is the very first time I have seen anyone make such a claim.

Kerry Kerstetter

Q:

Kerry,
Thank you for your answers. One more question.  Once equipment is purchased and the Section 179 full deduction is taken, is their ever a point in time where the owner could sell the equipment, not have to recapture the amount depreciated and pay taxes on the transaction?  I was told that if I took the deduction and held the equipment for five years, I could avoid the recapture tax, even though I sell the equipment five years later for the value I paid for it.

A:

You were either given incorrect information or are interpreting it improperly.

There is a potential recapture on Section 179 property if its business use percentage falls below 50% before the end of its normal MACRS recovery period (i.e. 5 or 7 years). 

However, if an asset’s cost has been deducted on your tax return through Section 179 and/or regular depreciation, and fully depreciated, its cost basis on your books is zero.  If you ever sell that item before you die, anything you get for it will be taxable income.  Whatever you receive for it, up to its original cost, will be recapture of Sec. 179 and depreciation and subject to its 25% Federal income tax rate, plus any applicable State tax.

If you give a fully depreciated item to someone else, your cost basis carries over to that person.  If s/he sells it, anything received will be taxable income and taxed as depreciation recapture.

As I mentioned in my earlier response, the only way to not have taxable income on the item’s sale is if you leave it to your heirs as part of your estate.  Even though it had been fully depreciated on your personal books, its cost basis is stepped up to its fair market value.  If your heirs sell it for that amount or less, it will be tax free to them.

I hope this clears this matter up for you.  As always, it is crucial that you work with a professional tax advisor when considering real life transactions such as these.

Kerry Kerstetter

This topic seems to generate a lot of questions, in spite of being one of the least complicated tax matters.

Q:

Kerry,
Can a C Corp take the full section 179 deduction and the individual take the full deduction on his 1040 as well?
For Estate Tax Purposes, If I purchase an asset and use the 179 deduction, would the value of the asset be zero in my estate?
Thank you

A:

That is one of the big benefits of using a C corp instead of an S, as I have long described on my website.

The same assets obviously can’t be claimed on both the 1120 and 1040; but if new business equipment purchases are split between the corp name and your personal name, it is possible to claim as much as $204,000 per year in Section 179 deductions.

When somebody passes away, the values used for estate tax purposes are the fair market values of those items as of the date of their passing.  The cost basis that the decedent had before passing away is irrelevant. 

An item, such as a vehicle could have a book value for the decedent of zero (fully depreciated), yet have an estate value of much more.   This stepped up basis rule is what many of us call the ultimate escape from taxes, especially in regard to assets like rental real estate.  I have seen several cases where heirs have been able to start claiming nice size depreciation deductions on property that had already been essentially fully depreciated by the previous owners.

Kerry Kerstetter

Q:

I read about the section 179 on your web posting.  I have a question and wonder if you can clarify this for me.

I own 100 percent of an S corp, california.

I purchased two new SUV’s, each of which is over 6K lbs.  They were each approximately 50,000.  Since I purchased these in June of 2004 do I qualify for all of the $100K purchase for this tax year, or was the October revision to this bill allowing only 25K for each auto retroactive to the include autos purchased “pre-october 22, 2004”?

Thanks for your help.

A:

Any SUV purchased before 10/22/04 is not subject to the new $25,000 Sec. 179 limit; so it looks like you lucked out by buying yours before that date.  Of course, you have to have actually used them for business before October 22, not just purchased them, in order to be eligible for the Sec. 179 deduction.

Kerry Kerstetter

Q:

I appreciate your web site. I am trying to complete a homework assignment and have found your web site a great help for my income tax class.

This is my problem,

Lori, who is single, purchased a copier (5-yr class property) for $31,000 and furniture (7-yr class property) for $42,000 on May 20, 2003. Lori expects the taxable income derived from her business (without regard to the amount expensed under sec 179 to be about $100,000. Lori wants to elect immediate sec 179 expensing, but she doesn’t know which asset she should expense under sec 179.

a.) determine Lori’s total deduction if the sec 179 expense is taken with respect to the copier.

b.) determine Lori’s total deduction if the sec 179 expense is taken with respect to the furniture.

c.) What is your advice to Lori?

This assumes that sec 179 is at $25,000 not the increased $100,000.

According to your site, there is a limit of one maximum. Does that mean Lori can claim either the copier or the furniture and not both even if the cost for both were below the maximum?

I would appreciate your help if you have time.

Thanks,

As a rule, I don’t answer homework questions.  However, you mentioned something that has me concerned that others may also be misunderstanding the rules for claiming the Section 179 expensing deduction.

I’m not sure where you are getting the idea that it can only be claimed on one asset per year per tax return.  That is not the case at all.  In fact, I often prepare tax returns where the Section 179 section of Form 4562 says “See Attached Schedule” and several different items are listed on a backup schedule.

Whatever the limit is for the year ($25,000 or $100,000), it can be used to cover the cost of dozens of individual assets for the year.

It is also not an “all or nothing” application.  As an election, you have the right to claim nothing under Section 179 for the year, or perhaps only part of the total that can potentially be claimed. 

You also have the option of dividing the allowable deduction among the different assets acquired during the year.  For example, you could claim $10,000 against the copier and $15,000 against the furniture.  You would then depreciate the remaining cost basis of each asset over its useful life. 

Normally, if maximum deductions are the goal, when one asset has a longer class life than another (such as seven vs. five years), it makes more sense to use Sec. 179 on the asset with the longer life.

I hope this clears things up for you.  Good luck in your class.

Kerry Kerstetter

Not everyone was aware that the Section 179 deduction was going to be reduced for SUVs, as per this email I received.

Kerry

I was reading your tax law on section 179 that was updated on Oct 27.  I was surprised to see that there is a limit of 25,000 on the claim for SUV’s I thought this would have been valid through the end of the year.  I am to purchase a 6008 lb vehicle tomorrow and my friend told me that this deduction has gone away but from your article it was reduced from the full
amount to a max of 25K.

If this correct and how did this get passed so quietly… I have not heard of this change at all till reading your document and my tax advise was not aware of it.

Please feel free to call or reply.

My reply:

The issue of limiting the amount deductible for buying SUVs wasn’t actually a new thing.  Ever since the Section 179 deduction was increased from $24,000 to $100,000, and people discovered its ability to be used for business vehicles weighing more than 6,000 pounds (a rule actually passed in 1984), environmental wackos started screaming bloody murder that this was encouraging people to buy evil gas guzzling SUVs.

Several months ago, there was a bill passed by a Senate committee with this new $25,000 limit for SUVs, but it never became part of an actual law.  The law that was just signed by President Bush last week was mainly a stimulus bill, with several tax reductions.  In order to achieve the normal goal of being “fiscally responsible,” our rulers in Congress had to take away some tax breaks in order to offset the new ones they were establishing.  This limit on deducting SUV purchases was just the thing to fit that need.

I guess the issue of adequate advance notice regarding this change is somewhat subjective.  I know that for well over two full weeks prior to its enactment, there were all kinds of discussions about this very topic on several tax and vehicle websites.  There was so much discussion of just this one item, that most people were ignoring the several other parts of that tax law, many of which are very good for those of us who believe in lower taxes.

Having been in this profession for as long as I have, I have yet to figure out any consistent rationale for the effective dates that our rulers in DC use for new tax laws.  Sometimes, it is at the beginning of the following year, while on other occasions, it’s as of the date the law is signed by the President.  We actually have to consider ourselves somewhat lucky that we were given until Bush signed the law, because I have seen several laws over the past decades where similar kinds of restrictions were established effective as of some date several months prior to the signing, based on when a congressional committee inserted that provision into the law.

I hope this clears up any confusion you had over where this new restriction on deducting the cost of SUVs came from.

Kerry Kerstetter

NATP has a good 13 page pdf summary of the tax law that was signed into law last week.  Pages 7 & 8 have the changes in Section 179.

I was just reading the latest Federal Tax Bulletin from Kleinrock and their example of the new limited tax deductions for business SUVs illustrates that things aren’t as bad as many have been worrying about.

The example in their newsletter is of a $70,000 SUV purchased new in 2005. On top of the $25,000 Section 179 deduction, the owner can also claim the 50% additional first-year depreciation of $22,500 based on the remaining $45,000 cost basis. With the normal $4,500 depreciation for a vehicle, the total cost of the SUV that can be deducted in that first year will be $52,000, with the remaining $18,000 deducted over the following four years.

The big differences to keep in mind are that the 50% additional first-year depreciation is only available for brand new business assets, while Section 179 can be claimed for anything that is new to the taxpayer, including items previously owned and used by someone else.

Q:

Good Morning!

I have read some of your responses to the 179 deduction and I appreciate you taking the time to help others make wise tax decisions. I have had a stellar year as an employee I have paid a small fortune in taxes to federal and state. I have also been fortunate to sell some stock options and cashed out a deferred comp plan. My taxes due next year are quite significant. As of this week I have formed a single member LLC and will be purchasing heavy machinery over 6,000 GVWR. The business will no doubt take a substantial loss this year due to the lateness of the year and startup expenses. Is it possible that my gross income including the stock sale is too much whereas disallowing me the opportunity to use the 179 deduction to its fullest? Is it possible that AMT could limit the amount of deduction I can take for the 179 deduction.

Again thank you for being so helpful in sharing your knowledge.

A:

There is no high income phase-out for the Section 179 deduction that is claimed on the front of the 1040, as it sounds like yours would be. There is a phase-out for those who claim it on Schedule A, normally as an employee expense.

If you didn’t catch the news today, the Section 179 deduction for business vehicles weighing under 14,000 pounds has just been lowered to $25,000 from the $102,000 maximum we had previously.

AMT is the most difficult tax to calculate without some actual number crunching. Capital gains and stock options can trigger the AMT. You should have your personal tax advisor run your numbers for you to see if that will be the case for you.

Another, probably less expensive, way to get a preview of your 2004 taxes is to get a copy of one of the cheapo 2003 tax programs, such as Turbo-Tax, and enter your 2004 figures. It won’t be exact; but it will give you a pretty good ballpark idea of where you will be.

Good luck. I hope this helps.

Kerry Kerstetter

Bush Signs $136 Billion Corporate Tax-Cut Bill – The new limit for business SUVs under Section 179 will take effect tomorrow, October 23.

More Details: Bush Signs $136B Corporate Tax Cut Bill

Here is the actual text of the provision limiting SUVs to $25,000:

SEC. 910. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN PASSENGER AUTOMOBILES.

(a) IN GENERAL- Section 179(b) (relating to limitations) is amended by adding at the end the following new paragraph:

`(6) LIMITATION ON COST TAKEN INTO ACCOUNT FOR CERTAIN PASSENGER VEHICLES-

`(A) IN GENERAL- The cost of any sport utility vehicle for any taxable year which may be taken into account under this section shall not exceed $25,000.

`(B) SPORT UTILITY VEHICLE- For purposes of subparagraph (A)–

`(i) IN GENERAL- The term `sport utility vehicle’ means any 4-wheeled vehicle–

`(I) which is primarily designed or which can be used to carry passengers over public streets, roads, or highways (except any vehicle operated exclusively on a rail or rails),

`(II) which is not subject to section 280F, and

`(III) which is rated at not more than 14,000 pounds gross vehicle weight.

`(ii) CERTAIN VEHICLES EXCLUDED- Such term does not include any vehicle which–

`(I) is designed to have a seating capacity of more than 9 persons behind the driver’s seat,

`(II) is equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or

`(III) has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.’.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to property placed in service after the date of the enactment of this Act.