Q:

Subject: section 179

Curious, would an atm qualitfy for section 179.  Maybe one can argue that the atm part qualifies but if it is enclosed in a building, it is not.   I presume we would have to have the atm in place and working prior to year end.  We are on cash basis for tax purposes and a S corp.

A:

You should be working with your own personal professional tax advisor on matters like this.

S/he will most likely tell you that the actual ATM machines will qualify for Sec. 179; but structures built to house them do not.

Sec. 179 and depreciation deductions have always required that the asset be actually placed into active service before the end of the tax year, regardless of when you pay for them.

It is also not relevant for Sec. 179 or deprecation purposes how you pay for the machines, cash or via a loan.

Again, your own personal tax pro should be able to give you more specific advice for your particular situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your time

Q:

Hello Kerry,

I work for an accounting software company and I have a question for you regarding Section 179. Our software is not “off the shelf” as we have resellers that customers purchase from. I am no accountant so please be kind and speak in laymen’s terms.

We have customers that initially purchased the software, but did not stay on a plan. They now want to come back on a plan and get all the software that they missed which has new functionality to benefit their business. Some need to update their computer hardware, server, printers, etc. for compatibility issues, and/or add additional user licenses and modules. If they decide to do this, does the software and/or plan fall under Section 179?

Thank you for your assistance.

A:

I hope you’re not planning to give tax advice to your customers, because that is extremely dangerous for both you and for them. Sales people giving out tax advice is one of the pet peeves we in the tax profession have long had to deal with; often with bad results if that advice was heeded by a customer without verification with their own professional tax advisors.

The costs for your software, plan and the related hardware should be potentially deductible as either Section 179 or as normal operating expenses, based on the costs involved and the useful life of the software.

If deductibility is a deal breaker for your customers, they should each check with their own professional tax advisors to see how much they will be able to deduct in the first year. There are limits based on taxable income and the total cost of new property purchased during the year; so there is absolutely no way you can be in a position to know what Section 179 deductions they may be able to claim.

Good luck. I hope this helps.

Kerry Kerstetter

Follow-Up:

Hello Kerry,

I would personally never give out information in a territory I am unfamiliar with. Our Managers here have advised us already not to give out tax advice. This Economic Stimulus is not being used as a “deal breaker” by any means. We have a PDF on the Economic Stimulus (I attached it), but I wanted to find out if this is something worth while for the customer or if I should not even mention it at all. It seems like it is a case-by-case instance and there is no real black or white about it. For now, I’ll just have them view the PDF and contact their CPA.

Thank you for your assistance.

Q:

Subject: Tax Question

To Whom it May Concern,

Recently my father and I downloaded some material from your website. My father is involved in an appeal with the IRS. He needs some supporting documentation (case histories would be best) in reference to using 179A instead of depreciation for a tractor bought in 1999 then transferred to strictly business use in 2002. Where might we find this type on information. Any help you can offer would be greatly appreciated. Thank you

A:

This is shaping up to be a perfect example of the foolishness of trying to handle tax matters without the assistance of a qualified professional tax advisor.

First is the issue of Section 179 expensing of the tractor.  From your question, I am assuming that your father tried to expense the cost of the tractor on his 2002 1040, when he started using it for farming.  I can’t provide any cases to support this position because it is wrong. Only equipment that has been newly acquired from an unrelated party qualifies for the Section 179 election.  Converting a personal use asset to business use does not meet this test because it has been acquired from himself.  Any competent professional tax preparer would have known that.

Next is the issue of handling an IRS audit without professional representation. This is insane and will result in heavy additional taxes, penalties and interest.

Since he is still with Appeals, it is not too late to hire a professional tax advisor to take over the case on his behalf.  Since it is obvious he will be losing the tax break from the Section 179 on the tractor, it is imperative that a tax pro review the entire tax return to see if there are other areas in which legitimate deductions were overlooked.  It is very likely that a competent tax pro will be able to locate enough other missed deductions to more than offset the loss of the Section 179 deduction.

This is all the more crucial due to the tax year being reviewed, 2002. Any additional taxes that are determined to be owed will also be assessed penalties and interest starting from 4/15/03, which will magnify the bottom line amount IRS will be demanding.  When you toss in the comparable State taxes, penalties and interest on the final IRS determination, there could be a substantial amount due.  Risking that in order to save from having to pay a tax pro’s fee is ludicrous.

Good luck.  I hope this helps.

Kerry Kerstetter

Q:

Kerry if I finance the tractor will I still. Get same write off.

A:

Both the Section 179 expensing and depreciation deductions have nothing to do with how the new asset is financed.  It is the exact same deduction whether you pay cash or take out a loan.

The only difference will be no interest expense deduction for a cash purchase.

Kerry

It still amazes me that all of the media coverage of the recent tax law focuses on nothing but the tiny rebate checks and ignores the huge increase in the Section 179 deduction that could save small business owners a lot more money than the stupid rebates would provide. 

It was interesting to receive a mass email today from HP with the following subject:

See how the new economic stimulus bill might benefit you!

The top text:

The economic stimulus bill signed into law by President Bush on February 13, 2008 provides some exciting benefits for business!

One provision substantially increases the amount that small businesses can deduct for certain capital equipment expenditures from $128,000 to $250,000.

A second provision allows for bonus depreciation in 2008 on certain capital equipment expenditures purchased this year that would normally be depreciated over many years.

Of course, we recommend you speak with your tax advisor on how these provisions can benefit you directly.

This reminds me of a snail mail letter I received in 1984 from American Motors shortly after our rulers in DC had instituted the luxury car limits on vehicle depreciation.  The letter was addressed to tax professionals, advising us of how much more in tax savings via depreciation and the Investment Tax Credit our clients could have if they were to purchase a Jeep Grand Wagoneer because it weighed over 6,000 pounds, instead of a lighter vehicle. 

I have always thought this kind of angle is a smart marketing approach and have been surprised that more companies didn’t use it.

Q:

Subject: section 179

Kerry,
I don’t know if you will read or answer this email but here goes with my question.  According to my CPA some
items that I purchsed in ’07 will qualify for a section 179 deduction on my taxes.  When I read your blog I got really confused.  Let me explain my situation.

1031 exchanged residential real estate property that is fully depreciated.  Original purchase 1981.
In 2007 I remodeled and purchased ref, stove, dw, new tile & carpet flooring & new kit. countertops.  Cost
aprox $10,000.  Will these purchases qualify for 179?

I am retired and own two residential rental properties one rented 12 mos., the other only seasonal.

Thanks,

A:

The ability to deduct the costs of the new items depends on which schedule you are using to report the income and expenses for the properties.

For residential rental property reported on Schedule E, assets used there are specifically not eligible for Section 179 expensing.

For properties that are rented out for an average of less than seven days at a time, and which are thus reported on Schedule C, movable equipment purchased for those properties are probably eligible for Section 179 expensing, subject to the other limitations on Section 179.  Items that become a permanent part of the structure, such as tiling, flooring and kitchen counters, are not eligible.

Your professional tax advisor should understand the difference between these two types of rental properties and understand which types of equipment qualify for Section 179 and which don’t.

Good luck  I hope this helps.

Kerry Kerstetter

Q:

Subject: section 179 limits

Hi Tax Guru:

I have just finished reading the 179 entry on your website. Quick question, as a small business owner, can I purchase a new 6000 lb suv every year to qualify for the $25K deduction?

A:

Of course you can, if you want that many SUVs.  I used to have a client who traded in his car every six months for a brand new one.

As I’ve discussed numerous times, there are tax consequences to the way in which the old SUV is disposed of; selling vs. trading.

Your personal professional tax advisor can give you more specific info for your unique situation.

Good luck.

Kerry Kerstetter

Q:

Subject: Section 179

My wife is currently are using the standard mileage deduction on a Chevy we transferred into business service 4 years ago.  We are expecting a large tax liability this year and next year my wife is taking off 3 months from her LCC business (she uses schedule C for business income) so we want to take the section 179 depr deduction this year.

If we buy the car on 12-31-07 and put it into service that day, it will be used 100% this year for the business.  The existing vehicle (which will be traded in with a $10,000 trade value) will have about 75% business.  Can I still claim 100% of the 179 deduction on the new SUV?

If next year the business use drops to 75% is there any recapture requirements or does that only effect next years actual cost deduction?

Finally, any problem with using both the standard deduction on the old vehicle for 2007 (it will be taken out of service on 12-28-07) as well as using the 179 deduction for the new car?  The cost of the new car is $45k, with the trade in my cash loan is $35k so I have $10k for deprecation, would I use the 30% or 50% method going forward in future years for the $10k left to deduct using the actual method?

Is the trade still considered like kind even though I changed deprecation methods?

I know this is late in the season, but we are making the purchase, now we have to decide how to handle the tax issues.

Thanks

A:

You really need to be working with a professional tax advisor on matters such as this rater than trying to stumble your way through the tax maze on your own.

Just some quick answers to your main queries.

There is no actual Section 179 or deprecation recapture required in subsequent years unless the business usage percentage drops below 50% or the asset is sold.  If you claim 100% business usage for 2007 and then the business usage drips to 75% in 2008, the 2008 depreciation deduction will most likely be zero, depending on how much of the purchase price you are expensing for 2007.

The numbers you gave are a little confusing.  Basically, the amount eligible for Section 179 expensing is the excess of the new vehicle’s purchase price over the trade in allowance you are given.  For example, if the new vehicle is costing $45,000 and the dealer allows you a net of $10,000, the extra $35,000 is available for the Section 179, subject to the various other limits.  If there is a pay-off or assumption of an old loan on the old vehicle, the calculation changes, with a lower amount being available for Section 179.

Any undepreciated cost of the older vehicle would continue to be depreciated over the life of the new vehicle.  Since you have been using the standard mileage method, you will definitely need to have a professional tax advisor do the basis calculations on the old vehicle, the like kind exchange worksheet and form (8824) and the new basis of the replacement vehicle.  Like kind has to do with the vehicle for vehicle and the fact that you are going to be using different deprecation methods for the new vs old one doesn’t have any bearing whatsoever.
 
Again, you should be able to see that this can get very messy on your 1040 and you definitely need to be working with a tax pro who can see that everything is reported properly.

Good luck.

Kerry Kerstetter

 

 

As I had been predicting, the economic stimulus program from our rulers in DC includes a very generous increase in the maximum Section 179 deduction.  All of the media attention regarding the stimulus bill has been on the tiny rebates and they have overlooked and ignored this very substantial tax break for small businesses. 

Here is how it is explained in the recent Spidell Flash E-mail:

On February 7, 2008 both the Senate and House of Representatives passed H.R. 5140, the Economic Stimulus Act of 2008 (the Act), which the President is expected to sign. The Act contains provisions pertaining to tax rebates and depreciation.

Increased §179 plus first year bonus depreciation

For tax years beginning in 2008, the Act increases the $128,000 §179 expensing limit to $250,000 and boosts the overall investment limit from $510,000 to $800,000.

In addition, the Act generally permits a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed in service after December 31, 2007, and before January 1, 2009.

Here is how Spidell explains the rebates for those not classified as evil rich by our DC rulers:

Based on 2007 returns, a rebate of up to $600 would go to single filers with AGI of $75,000 or less ($1,200 for married filing joint with AGI of $150,000 or less). In addition, parents would receive $300 rebates per child. Tax filers who do not owe income taxes but have at least $3,000 in qualifying income would get a $300 rebate. The rebates are phased out by 5% of income in excess of the threshold amounts.

The IRS is expected to start sending out checks in early May with all rebates completed by mid-summer, according to Treasury Secretary Henry Paulson.

Q:

Subject: Section 179 deduction for 2008

The information was last updated Oct 2007, I was just wondering if it still correct because there is different info on other sites?

Thanks

Regards,

A:

That info is correct.

We’re still waiting to see if the current debates over economic stimulus plans will include an additional increase in the maximum Section 179 deduction.  If it does, I will update my web site info.

Kerry Kerstetter