Q:

I do not understand the phase out concept for Sec. 179 accelerated depreciation. For 2009 for example, the maximum deduction is $250,000, so what does it mean to have higher phase outs? You would never claim more than $250,000, so how would it ever phase out?

A:

The expensing election under Section 179 was always intended to be for smaller businesses. To make sure that larger businesses weren’t able to benefit from it, our rulers in DC added the phase-out thresholds based on the dollar amounts of equipment that were acquired during the year. The underlying concept is that, any company large enough to be able to afford those large amounts of new equipment purchases didn’t need the additional tax help from Section 179 because their normal deprecation deductions would be large enough.

Whether this makes sense or not isn’t the key. It’s how our rulers have decided to limit the application of Section 179.

I hope this clears up any confusion you have.

Kerry Kerstetter

Follow-Up:

I get it now. By making sense, I did not mean in the ultimate sense, but in the limited sense of whether there was even an arguable policy rationale. Without one, I would not be sure whether the explanation was correct. Now I get it.

Q:

Subject: 179 Question

There is a question which falls through the cracks of the answer provided below.  It’s pretty clear from your answer that Corporations can not reduce income below zero using a 179 deduction, but that a Schedule C business can (provided that there is sufficient wage income to produce a total taxable income > 0.00).  However, what about a Partnership or LLC?  Can they have a loss based on a 179 deduction, and have the partner use it on their 1040 via a K-1, provided that they have sufficient wage income to have a taxable income remain > 0.00?

Thanks,

A:

I have discussed this point on a few occasions, but it has been a while.

With pass-through entities, such as S corps and partnerships, the Section 179 limit is tested against taxable income at both levels; that of the 1065 or 1120S and again at the owners’ 1040 level.

One big difference is the fact that, for this test, the 1065 or 1120S income can be increased by any owner compensation that has been deducted, such as wages or guaranteed payments.  This could result in a Section 179 deduction giving the business a net loss.

From a logistical perspective, a 1065 K-1 would most likely net out to zero when taking into account the entries for net loss, Section 179 and Guaranteed Payments.  This contrasts with the K-1 from an 1120S, which could have a net overall loss because the W-2 income isn’t shown on the K-1.

The interplay of these kinds of tests are why it is important to be working with an experienced professional tax advisor with up to date tax prep software.

I hope this isn’t too confusing to follow.  You should work with your own tax pro to see how it would look with your own businesses.

Good luck.

Kerry Kerstetter

Q:

Subject: section 179 question

If I have taken section 179 expense deduction in 2006 and 2007 and have had to close my business in 2008 will I have to claim these deductions from these years as income in 2008?

Another question if you could please give me advice.  I installed new carpet, laminate flooring and countertops/cabinets in my leased office in 2008 could these items be considered section 179 expenses or are they items that could be classfied as building repairs or would I have to depreciate them and over how many years?

Thanks,

A:

You need to be working with an experienced professional tax advisor to make sure you do things properly here.

Basically, if you claimed Section 179 for business equipment on previous tax returns, the adjusted cost basis of those assets is zero.  This means that anything you receive for them in a sale is going to be taxable gain; technically a recapture of the previously deducted Section 179.

If you just shut down the business and don’t sell off the assets, there will still be a smaller taxable recapture because their business usage has fallen below 50%.  Your personal professional tax advisor should have tax software that will calculate that recapture amount.

There are various ways in which your leasehold improvements can be expensed and/or depreciated.  Your personal professional tax advisor should be able to use the method most appropriate and beneficial for your unique situation.

I hope this helps.

Good luck.

Kerry Kerstetter

Q:

Subject: Section 179 for 2009

Hello Mr. Kerstetter,

My company is trying to publish some Section 179 information for our lessees. We are having a difficult time gathering some of the information. Your website typically lends itself to helpful and up-to-date facts. Is there a place I could go to better gather this information? I’ve looked at the IRS and their site is difficult to find what I need.

I’m assuming the first year write off is $128,000, but what is Cola?

Also, 2008 is the last year it lists a phase out $ amount.

Thank you,

A:

We’ve been out of power for a while now, so I haven’t been able to update my main website lately. I have attached the Section 179 chart from the latest edition of TheTaxBook.

As you can see, as it stands right now, the 2009 maximum Section 179 deduction is $133,000, which is the base of $125,000 plus an additional $8,000 for the annual Cost Of Living Adjustment (COLA).

As you can also see on this chart, the phaseout of the Section 179 deduction for 2009 begins at $530,000 of new equipment purchases, which is the base of $500,000 plus an additional $30,000 for the annual Cost Of Living Adjustment (COLA).

Preparing a completely accurate long term multi-year chart of the Section 179 limits is close to impossible because it is a favorite item to be changed by our rulers in DC. It is one of the best incentives for small business owners to invest in new equipment, so chances are good that it will be bumped up in future economic stimulation legislation.

As with all tax matters, it is a full time job just staying current on all of the changes; so be sure to include that in any tax related materials you produce. A warning such as “All information presented is subject to changes at the whims of the politicians in DC. Check with your own personal professional tax advisor before undertaking any tax related transactions” would help cover your rear in case someone relies on info you produce that becomes outdated.

Good luck. I hope this is helpful.

Kerry Kerstetter

Q:

Subject: Section 179 Suggestion

Hello Kerry,

I came across your site here today trying to make heads or tails of my deductions for a store I just opened. I found your explanation to be quite clear and easy to understand over the IRS one. I didn’t completely understand the cut off for vehicles. Thank you.

I also have a suggestion. I think it would be great if you added a calculator for section 179. I found a good one that helped me as well here. I think it might help others as well to get an estimate on what their deduction will be. I hope this was of help.

Have a nice day,

A:

I’m glad you found my info on Section 179 to be informative. It is meant to just be a starting point. Any actual calculations should be handled by your own professional tax advisor who can factor in the other criteria that will determine the actual expected tax savings. No online calculator can do a decent job of that kind of analysis.

For example, the one that you referred to is dangerously simplistic and incomplete in the information it works with and is really nothing more than a sales tool to make it appear that equipment costs less than it actually does. When I entered the figure of $100,000 in the Cost of Equipment box, it automatically assumed a tax savings of $35,000 for a net cost of $65,000. It didn’t take into consideration some critical factors that could seriously limit the actual Section 179 deduction, such as how much other equipment was acquired during the year and the level of Taxable Income before any Sec. 179 deduction.

I don’t mean to be harsh here, but one of the biggest mistakes I see constantly is people believing they can function in business without the assistance of an experienced professional tax advisor. While you may think this quick and easy calculator is helping you, it is almost certainly giving you the wrong information unless you are making huge profits and are in the 35% Federal tax bracket. Again, not to be cruel, but anyone making that kind of money is insane and financially irresponsible to try to navigate the tax waters on their own.

I’m sorry to dump on you here, but you pushed a button that needed expressing.

Good luck.

Kerry Kerstetter

Q-1:

Subject:  Section 179 question

Can the date of purchase be defined as the date placed in service.  If payment is made this year, can it go toward next year’s expense if not placed into service until then?

A-1:

You seem to be confused about when depreciation and Section 179 expensing become available for business assets.  The key date is when the asset is placed into service; so there isn’t actually any choice here.  If you buy a new item this year and don’t actually start using it until next tax year, the only year you could possibly claim Section 179 would be next year.

Your own personal professional tax advisor should be able to explain this to you in more specifics for your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

Thanks, but as a practical matter in my business (I sell software to dentists) the docs expense is when they write the check (or when they charge it to their credit card, or when the first lease payment is made.  Nobody comes around to see if it is being used and when it started being used.

So, you are saying they could opt to pay for it in 2008 and not place into service until 2009, therefore taking the deduction in 2009.  This is requested at the end of the year sometimes if the doc has used up as much 179 expense as he has profit for the current year.

A-2:

Normally, this question goes in the opposite direction.  People assume they can prepay for some business asset in December and claim Section 179 even though it isn’t received or set up for use until next year.

As we all know, the tax system has a lot of the “honor system” built into it in regard to people claiming their deductions in the proper years.  However, IRS does occasionally audit tax returns to verify that things have been handled properly.  A canceled check is not sufficient documentation for a piece of business equipment or expensive custom software.  Auditors will demand to see the purchase invoice and will check the delivery and installation dates to see if the year placed in service matches that shown on the tax return.

I have to say that you are sticking your neck out quite dangerously by daring to give tax advice to your customers.  While they may play fast and loose with the technicalities of the years in which they claim their deductions, you run the risk of being sued by them if any of them were to get into trouble with IRS based on any such advice you provide.  The smart thing for you to do is to advise each of your customers to consult with their own personal professional tax advisors who can work out appropriate strategies for when to pay for and deduct the costs of your software.

Good luck.  I hope this helps.

Kerry Kerstetter

Q:

Subject:  2008 Section 179

I found your info on the web. I have a quick question. I am looking at a cap gains tax on the capital account of an LLC which I left in January. The account is about $460,000 and the tax about $69,000.

I am considering starting a property restoration business and the equipment is about $20,000 to $30,000. I might also need a van. If I spend 30,000 on equipment, will that reduce my cap gains tax by $30,000 because I am deducting 100% up to $250,000?

Thanks,

A:

This is something that you need to work on with the assistance of your personal professional tax advisor because it is more complicated than you are assuming.

The first misconception you have is regarding how the Section 179 deduction reduces taxes.  It is a deduction and not a credit; so it reduces taxable income and that reduces the income tax only by a percentage.  It is not a 100% reduction of tax as a credit would be. The amount of actual tax savings will be based on your Federal and State tax brackets, along with several other factors.  So, a $30,000 Section 179 deduction may only reduce your net taxes by only $10,000; not by $30,000.

The other big issue that you need to deal with is the limit on the Section 179 that you can claim based on your business related income. Normal capital gain income does not qualify for the Section 179 purposes, so the gain on your LLC termination can’t be offset against new Section 179 unless it also includes business profit and depreciation recapture.

The best thing to do would be to have your personal professional tax advisor run some pro-forma 2008 figures for you based on the real info you have, as well as the different assumptions you want to test in order to get a realistic estimation of any potential tax savings from buying and starting to use new business equipment before the end of 2008.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Yes very helpful.

Thanks a lot.

Q:

Subject:  2008 section 179

We have a “C” corporation that has a fiscal year ending September 30th. If we purchase equipment between 10/01/08 and 12/31/08, can we still get the addition 179 expense deduction and bonus depreciation?
 
Regards,

A:

That specific provision is currently based on the calendar year of 2008, so any assets that you do place into service from 10/1/08 through 12/31/08 will qualify for that special bonus depreciation on the 1120 you file for the FYE 9/30/09.

Your professional tax preparer’s tax software should pick that up automatically.  I know that my 2007 Lacerte software is automatically claiming the bonus depreciation on any asset that has a 2008 setup date.

There is also the possibility that the provision for the bonus depreciation will be extended for assets placed into service in 2009; but that will be up to our new rulers in 2009.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you very much .

Since it is one of the largest potential deductions available on income tax returns, the Section 179 expensing election generates a lot of email from people who are confused about it.  In the last few months, I have been receiving at least one each day, often from salespeople who are looking for ways to induce their customers to buy more products.  These sales pitches often include a flyer or short article on the benefits of Section 179. 

I am still plowing through a massive backlog of email, and I noticed one yesterday from a scientific equipment company promoting a free online seminar on December 2 presented by a CPA on what they call “Tax Code 179.”   It appears to be open to anyone and aimed more for small business owners than for tax professionals.  It doesn’t appear to qualify for CPE for tax pros; but it may still be useful for the newer ones.

I have no connection with any of the parties involved and don’t even know how I go on that particular mailing list.  I am passing it along in the hope that some folks will check it out and not need to send me so many repetitive questions on the issues of Section 179.  You can sign up for this webinar at Gerber Scientific Products’ website:
www.gspinc.com/taxcode179/