With the constantly changing tax environment, it is important to distinguish between what are actual real life changes in the laws and what are just proposals. I’ve never done a scientific study of this; but my guesstimate is that there are at least 100 tax change proposals for each one that makes its way into actual law. Changing your behavior based on the proposed changes can be very counter-productive.

What also happens is that people, including many tax pros, hear about the proposed changes and go around spreading them as if they were true; as in this letter I received today.

I am in Baghdad, Iraq until March and have the opportunity to buy a vehicle for my business at a reduced cost (one perk to being activated) while I am here. I read that the Senate voted to reduce the SUV tax break from $100,000 back to $25,000. Is this true? If so, will that affect the 2004 deduction of $100,000? It may be a factor on whether or not I purchase a large vehicle.

My Answer:

I guess it’s good that you’re able to think about tax matters while in the battle zone. I don’t know if I would be able to even consider taxes while in such a dangerous situation.

The rule limiting the Section 179 deduction for vehicles to just $25,000 did receive a lot of publicity; much more than it deserved. I never worried about it actually becoming law; so I didn’t spend a lot of time discussing it at the time.

As I had expected, that provision never got beyond the one Senate committee that passed it. It never reached the full Senate, any part of the House, or the President. The net effect is that restriction on deducting the cost of heavy vehicles is still nothing more than a wet dream for environmental wackos like Arianna Huffington and other busy-body hypocrites who want to tell the rest of us what kind of vehicles we can buy and drive.

I hope this helps resolve any confusion and lets you better plan your purchases.

Heeding the adage that, for every person who asks a question, there are many more out there who want to know the same thing, I share the following.

Question:

I have a question concerning IRS form 179, vehicle deduction.

I have a new SUV that I purchased in ’03 and use in my real estate business. I currently owe $40K. I will have funds in first quarter ’04 to pay off the loan. My question is will I still be able to deduct the vehicle with a “zero” balance owed in ’04 tax year therefore eliminating a monthly payment of $600 or should I maintain the payment for the deduction in ’04 tax year and beyond?

My response:

How much you owe on the SUV, either originally or later on, is completely irrelevant to the depreciation and Section 179 deductions on Form 4562. As I’ve said on a number of occasions, the 4562 deductions are exactly the same whether you pay cash for a new business asset or if you finance the entire purchase price.

The only difference you would have if you pay off the loan is no more deduction for the business portion of the interest you pay each year.

No offense, but these are very basic issues that your personal tax advisor should know about. It sounds like you should be looking for a new advisor if you want to keep your taxes as low as legally possible.

Good luck.

As I’ve discussed on several occasions, prepaying for some kinds of operating and other deductible expenses before midnight tomorrow will allow you to deduct them a year earlier than otherwise. There are some kinds of expenditures for which that strategy doesn’t work.

Inventory – Stocking up on items that are going to be resold does absolutely nothing for tax savings. Whether you use the Cash or Accrual method of accounting, the cost of unsold inventory has to be carried over to the next year’s tax return.

Equipment – As indicated by the dozens of postings I have made on the issue of the newly expanded Section 179 deduction, there is a lot of interest in this; especially in regard to vehicles weighing more than 6,000 pounds. One of the big misunderstandings I have been noticing is that people think they can just send in a check for some new equipment and claim the deduction on their 2003 tax return, even though it won’t be received until next year. That is not correct. You need to be careful here. You can only claim the Section 179 expensing election for equipment that has been received and actually placed into service by December 31, 2003. It’s not good enough just to prepay for new equipment. Anything that doesn’t arrive until 2004 can’t be deducted until that year’s tax return.

I have seen many people make these mistakes over the years by spending all of their money on inventory and future deliveries of equipment in the final weeks of December. It’s one of the unpleasant tasks of this job to have to break the news that they can’t deduct those expenditures, They then have to try to sell the inventory quickly enough to come up with the money to pay their taxes by April 15.

I am still receiving a lot of requests for a list of vehicles that weigh more than 6,000 pounds and thus qualify for the very generous $100,000 per year Section 179 expensing election. I did another Google search and found several pages, including the following, with such lists.

Jerry Reynolds Dealerships

Hanson, Bridgett

Meyer & Associates

Wolter & Raak

Briggs & Veselka

Bankrate.com

Detroit News

Kiplinger – Most comprehensive lists.

To dispel another misconception about the Section 179 deduction, it is not only available for corporations. Any business, including Schedule C sole proprietorships, can claim it.

One of the most common questions I am still receiving is whether the Section 179 expensing election is only available for the purchase of brand new assets or whether things such as used vehicles qualify. The answer is still the same. The asset just has to be new to you. You can claim the deduction for items purchased from anyone other than yourself or an entity controlled by you, such as a closely held corporation.

Some conservatives are unhappy with the president. Will they stay home in November? – Rather than sitting out the November 2004 election, Bush will get a stronger message of how disappointed people are in his support of bigger more expensive government if they vote for a candidate who believes in the limits on government as enumerated in the US Constitution, such as a Libertarian.

The GOP’s new drug benefit is a serious policy error.

Stop GOP ‘spending’ spree

My goal is good policy – Obviously, I strongly disagree with Mr. Bartlett’s characterization of the Libertarian Party as worthless.

U.S. Vehicle Sales Rev Higher in November – It’s funny that there’s no mention of the tax related motivators for people to buy new vehicles: Governor Arnold’s repeal of the tripled car tax in the PRC and the quadrupling of the Section 179 expensing allowance for heavy (over 6,000 pounds) vehicles.

Smart Tax Laws Would Put More Money in California’s Pocket – The L.A. Slimes hasn’t slowed down in its attacks on Arnold. This argument that people are better off with the higher property taxes on their vehicles, because they could deduct them on their income tax returns, is complete idiocy. This is the same widely held fallacy that tax deductions are equivalent to a full reimbursement. They want their readers to believe that taxpayers are better off paying $1,000 in higher property taxes so they can claim them on their Schedule A. The fact that the actual income tax savings would be only about $270, resulting in a net cost to the taxpayer of $730 is something the Slimes hopes people are too stupid to notice. In fact, anyone who thinks big tax deductions are a good thing can send me a check for a fully tax deductible $1,000 for tax advisory services and I will provide you with an IRS acceptable receipt. And for anyone who believes the L.A. Times that this is good deal, think of how much better your tax deductions would be if you were to send me a check for $10,000. You would save ten times as much in taxes. Be sure to get those checks in the mail before December 31 so that you can claim them on your 2003 tax returns. This offer is not limited to residents of the PRC. It makes just as much sense for anyone in the USA.

I received the following question earlier today, giving me a good opportunity to address one more misconception about how to properly utilize the Section 179 deduction.

I got your email off your tax website and have a question about the 179 deduction I can’t seem to find the answer to.

How do I claim the section 179 deduction on property that I have borrowed to buy? Can I use the section 179 form each year to write off only the amount I have paid back on the loan that year or do I have to write off the full amount in the year I put the property into use? And if I write off the full amount in a single year, how do I handle the subsequent years when making payments on the property?

My Response:

As I have contended for decades, most people routinely overpay their taxes because of poor bookkeeping. This specific issue is an area where I frequently see people short changing themselves out of very legitimate deductions. In fact, just a few days ago, I was working on a tax return where the client had booked $5,000 as a down payment on a backhoe and was under the impression that was all that could be claimed for that year. I informed her that we need to set up the full cost of the asset, including the loan for the additional portion of the purchase price, and we can deduct Section 179 based on the full cost.

The Section 179 deduction, as with normal depreciation, is based on the full cost of the asset. How you finance it makes no difference to IRS. It is treated the same whether you pay cash for the full amount or if you put zero money down and take on a loan for the full cost. In fact, for decades, I have been advising people that you can literally go out at the end of December, use your credit card to buy $20,000 of computer and business equipment, take it back to your office and set it up. You can then deduct the full cost on your 2003 tax return, even though you won’t even receive the bill until 2004 and may even take several years to pay it completely off.

The bookkeeping entry is very basic. When you buy the asset, you will debit the fixed asset account for the item’s full cost and credit your bank account for any down payment and credit the loan or credit card for the financed portion.

Payments on the loan are also booked conventionally. The loan balance is debited for the principal portion of the payment and interest expense is debited for the interest portion of the payment. Payments on the loan have no effect on the cost basis (and depreciation – Sec. 179 expense) for that asset.

I hope this helps you understand the concept & procedures.

Turkey-Time Tax Moves – Doing year-end tax planning is a hundred times more effective if you have all of your current year activity properly entered into QuickBooks. Otherwise, it’s just a matter of shooting in the dark.

Time to Commit to Your Company’s Retirement Plan

This measure will not strengthen Medicare – Written by one of the few GOP Senators with enough common sense to vote against this idiotic expansion of government control over health care.

Bush Now Directing Attention to Revamping Social Security – Any attempt to fix a system as fundamentally dishonest as SS is nothing more than our rulers’ standard practice of rearranging the deck chairs on the Titanic.

Congress decides bigger is better: Tax breaks target big SUVs – I’m still amazed at how many people, including plenty of tax pros, think that the six thousand pound weight threshold for generous vehicle tax breaks is something new. As I have been saying for the past nineteen and a half years, this rule exempting vehicles weighing more than 6,000 pounds from all of the luxury vehicle tax limits was enacted back in 1984. It is obviously worth a lot more starting in 2003 because the Section 179 deduction was increased from $24,000 to $100,000 per year.

Luckily, recent attempts by busy-bodies in the US Senate to limit the vehicle portion of that deduction to just $25,000 have failed to make it past committee. I’m sure all of those jokers who voted for that penalty against buyers of SUVs are completely oblivious to the fact that their taxpayer funded limousines weigh far more than any SUVs normal people would buy.

Congress has created an SUV-sized loophole – The anti-freedom environmental wackos aren’t giving up in their efforts to prevent people from claiming the Section 179 deduction for what they consider to be evil gas guzzlers. These people should just mind their own business and stop trying to force their own idiotic ideas of what is a legitimate form of transportation down the throats of others. Buyers of “gas guzzlers” are already punished enough every time they fill up their gas tanks. They don’t deserve to be treated as the kind of scourge of society that has long been used against unpopular groups, such as smokers.

The Section 179 expensing election really isn’t that complicated; but it still confuses people, especially those who want to save a few bucks and try to navigate the perilous waters of the tax system on their own, as in this recent email exchange.

Question Received:

Last year I purchased a truck and tractor for my business. I used Section 179 deduction on the truck ($35k) assuming I would use the deduction on the tractor this coming year. But I am reading that these deductions only apply to purchases on that year. Can I still use section 179 on the tractor that I purchased last year?

My Reply:

The Section 179 expensing election has always been available only for assets purchased and placed into service during the tax year in question. It has never been available for assets acquired in a previous year.

What many people do is stagger their asset purchases by year, so as to be able to expense each asset. For example, if you had purchased the tractor in one year and the truck in the next year, you could claim the Sec. 179 for each.

Another common strategy is to buy one of the assets in your personal name so you can Sec. 179 it on your 1040; and buy the other one through a C corp, so it can expense it on its 1120. That’s how I often advise clients who want to buy more than the year’s Sec. 179 maximum in one year.

Not to sound too self-serving, but this is a very basic concept that wouldn’t have been a surprise if you had consulted with a tax pro before you bought those things. The money you would have spent for knowledgeable advice would have been more than offset by tax savings from structuring things appropriately.

Good luck.

Kerry Kerstetter