Q:

Subject: section 179

Hi,
Was just inquiring, as far as you know, is the deductions for the above section still in effect? There was speculaion about it being cancelled by congress this year.If not can it still be used?

A:

If anything will be changed about the Section 179 deduction this year, it will be to raise the maximum amount that can be claimed; not lower it.

If our rulers in DC are serious about attacking what they perceive as an upcoming economic recession, they will encourage more spending on equipment by small businesses by making Section 179 more generous. Historically, that has been done many more times as a means of kick-starting the economy than has the ridiculous rebate program that is receiving more of the publicity right now.

Be sure to work closely with your own personal professional tax advisor to keep abreast of how the Section 179 can be utilized most efficiently for your unique circumstances.

Kerry Kerstetter

Q:

Subject: Section 179

Hello Kerry,

Thank you for your informative insight onto this project.

I do have one question for you.  Just as the limit has been adjusted for inflation as it has increased from $100,000 to $128,000, the phase out of Section 179 has been adjusted by the same percentage.  So it would seem to me that the phase out should have increased by 28% above the original $400,000.  If that is correct, the phase out should occur after $512,000 and not $510,000.  Would that not be correct?

Thanks,

A:

The Section 179 did not jump 28% at any one time.  It took several years to reach the current level of $128,000 in annual increases, plus a new law that was passed last year that increased the base before COLAs from $100,000 to $125,000.  There was never a COLA of 28% because that calculation is based on the annual inflation rate, which hasn’t been anywhere close to 28% since the days of Jimmy Carter.

You can see the recent historical and projected future Section 179 limits on my website.  
 
At the bottom of the page, check out the historical phase-out points.

As with almost all of the annual inflation adjustments in the tax code, they are rounded to the nearest $1,000 for the Section 179 expensing limit, and the nearest $10,000 for the beginning of the phase-out.  This is why, when looked at over a five year period, as you are doing here, the cumulative percentage adjustments can be slightly different.

I hope this helps you better understand how the maximum Section 179 grew a cumulative 28% from $100,000 in 2003 to the $128,000 we have now in 2008, while the phase-out threshold only grew 27.5% over that same time period.  It was the annual rounding.

Kerry Kerstetter

 
Follow-Up:

Hi Kerry,

 

I realize that the changes have occurred over a number of years, but I was unaware that the phase-out is rounded to the nearest $10,000.  That would explain why the limit is now $510,000 and not $512,000.  

 

Thanks for the clarification.

Our State rulers in Little Rock made an attempt to conform to the much higher available Federal allowance for Section 179 expensing.  They seemed to have accomplished that for a few months, until our DC Rulers increased the maximum in the middle of 2007.  This means we now have another difference between the IRS and DFA levels.  However, the difference is now much smaller than it had been in past years.

This is from the most recent DFA newsletter:

SECTION 179
Increase

Act 613 of 2007 adopted IRC Section 179 as in effect on January 1, 2007. At that time the maximum amount to be claimed was $112,000. This amount will be adjusted for inflation for the year 2008. In May 2007, Congress enacted an increase to $125,000. Arkansas has not adopted this increase.

For all purchases that qualify for Section 179 that were made after January 1, 2007, the maximum amount to be deducted for a calendar year tax return or any fiscal year tax return is $112,000, regardless of the fiscal year’s beginning date.

The investment limitation that was adopted is $450,000 and the maximum limitation is reduced dollar for dollar by the cost of qualified property placed in service during the tax year over the investment limitation. This will be adjusted for inflation for the year 2008. The code section 179 deduction is reduced to zero when the investment limitation reaches $562,000 (450,000 + 112,000).

Part of Section 179 dealing with the expensing cap on sport utility vehicles limitation of $25,000 was also adopted in this Act.

Q-1:

Subject: Section 179 question

Hi Kerry,

 

I am not sure if this is appropriate for me to email you with a tax question.  Please excuse me if it is not.

 

My wife is a realtor and did not have an income this year.  We are planning to file jointly and deduct her expenses from our total income.  Is it possible to also use the section 179 to deduct/depreciate a vehicle we are getting for her business this year if she does not have an income?

 

Regards,

A-1:

I have covered this issue several times on my blog.

Basically, it is very possible that having other kinds of earned income on your joint 1040, such as amounts from your W-2, will make it possible to claim a Section 179 expense on your wife’s Schedule C.  You professional tax preparer’s tax software should make this calculation automatically.  It is not something that you want to try to compute on your own.

Good luck.  I hope this helped.  Your own personal professional tax advisor can give you more specific numbers for your unique situation.  If you are planning to prepare your wife’s real estate Schedule C by yourself, without professional assistance, you are crazy and will pay much more in extra taxes than the amount of fees you will save.

Kerry Kerstetter

Q-2:

Thank you.  I have ask this question to several cpa’s and getting conflicting answers including one that used to work for IRS that said “no”.  I guess I am still looking for a decent cpa.

A-2:

As I’ve frequently warned, ex IRS employees often make terrible tax advisors because they are not able to make the mental transition from interpreting the tax code in favor of more money for the government to interpreting things in favor of clients.

As a little more documentation of what I said, here is an excerpt from the current QuickFinder Depreciation Handbook:
 

Strategy: Business taxable income does not have to be generated by the business in which the Section 179 property is used to count toward the business taxable income limit. In fact, the trade or business in which the Section 179 property is used can generate a loss, as long as the taxpayer’s net business taxable income from all sources is positive.

Example: Jon has a sole proprietorship that has a $45,000 loss for 2006 before considering any Section 179 deduction. He also reports $150,000 of wages and $3,000 of Section 1245 depreciation recapture from a partnership interest. He is active in the partnership’s business. Jon’s aggregate business taxable income for the Section 179 taxable income limit is $108,000 ($150,000 plus $3,000 from the partnership minus $45,000 loss from the proprietorship). Jon can claim the full $108,000 Section 179 deduction in 2006 (assuming total qualifying property does not exceed $430,000) for Section 179 property placed in service for his Schedule C activity.

Joint return. If a joint return is filed, the taxable incomes (or loss) of both spouses are aggregated, even though the Section 179 deduction may be related to the activities of only one spouse.

Example: Sue and Bo file a joint return. Sue has Form W-2 income of $125,000 in 2006. Her husband, Bo, reports a $12,000 business loss from his proprietorship; their aggregate trade or business income for claiming a Section 179 deduction by Bo’s proprietorship is $113,000 ($125,000 – $12,000). Bo is entitled to claim up to $108,000 of Section 179 expense (assuming total qualifying property does not exceed $430,000) for eligible asset additions.

Good luck.

Kerry

Q:

Subject: Section 179

Tax Guru:

I have a circumstance regarding section 179 and am a little confused.  A client of mine bought 2 medium sized trucks weighing over 6,000 lbs. each for $113,000.  He bought them personally and rented it to his business!  Would there be any circumstance that he could take section 179 deduction? 

I have done research under codes and publications and do not specify this situation.  The descriptions and examples are very vague.  Thank you for all of your help.

A:

I recall posting an email about this on my blog a while ago, but I can’t seem to locate it.

The rules for claiming Section 179 for assets that are to be leased out have been summarized as follows in the QuickFinder Depreciation Handbook:

Leased property. For noncorporate taxpayers, leased property is not eligible for Section 179 expense, unless:

1)     The taxpayer manufactures (or produces) the property to lease to others.

2)     The taxpayer purchases the property to lease to others and both the following tests are met:

  The term of the lease (including options to renew) is less than 50% of the property’s class life.

  For the first 12 months after the property is transferred to the lessee, the total business deductions on the property exceed 15% of the property’s rental income.

Basically, the Section 179 is really intended to benefit the owners of assets who actually use them in the conduct of a business.  If your client can set up the leases of his trucks so as to comply with the above requirements, such as short term lease time frames and his paying some of the maintenance costs, he should be able to claim Section 179 deductions for them.

Good luck.  I hope this helps.

Kerry Kerstetter

Q:

Got this address on the internet……..I have a general question
Would really appreciate an answer.
I have a C Corp……restaurant biz…….I am planning  on buying some big kitchen equipment……..and I can buy it in Dec 2007
Is there any reason I can’t pay for it and then Section 179 the depreciation in order to  offset some profit………even if I am not yet using the equipment..

A:

As your own personal professional tax advisor should have told you, the Section 179 law is very specific about the new equipment needing to be purchased and placed into service during the tax year.  Just prepaying for something and not actually using it in your business until the next year will not fly.  Any salesperson who told you otherwise is blowing smoke up your ass and cares more about his/her commission than being honest.

The good thing is that when during the year the items are placed into service isn’t relevant.  Starting to use a new piece of equipment on December 31 is just as good for the Section 179 eligibility as any other date during the year, assuming a calendar tax year.

Get with your personal professional tax advisor and s/he should be able to give you other ideas on how to smooth out your income before the end of your tax year.  There are plenty of perfectly legal ways to bleed out corporate profits without having to cheat on Section 179.

If you don’t have a professional tax advisor helping you with your business, you are in very dangerous territory and you need to start working with one pronto before you do any more damage to yourself.

Good luck.

Kerry Kerstetter

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Q:

Subject: 179 Inuiry

 

I like your weblog.  I heard the 179 deduction for 6,000 lb vehilce is going to be eliminated in 2008? True?  Also, in general, what is the best entity as a real estate broker?  S Corp? Thanks for feedback.

A:

You are the victim of either a hoax or, more likely, bad and outdated info on the Section 179 deduction, which is very prevalent on the web.  As you can see on my Section 179 web page, the only change for 2008 is a higher maximum. 

I have a suggestion for anyone who hears or sees notices of changes such as you are questioning.  Demand that the person making the claim provide documentation of that fact beyond just that he heard it from someone.  Until a rumor has been properly documented, it should not be trusted or in any way relied on.  I am frankly getting a little tired of debunking these kinds of unsubstantiated rumors, where people try to put me on the spot to prove that something hasn’t been changed, when the burden of proof in this kind of situation should rest on those who claim that an actual change has been enacted.

In regard to the best entity to use, that is a decision that must be made with the assistance of a qualified professional tax advisor, who can properly analyze all of the unique details involved.  There is no such thing as a one size fits all approach to this kind of thing and anyone who claims that there is should be avoided.

Good luck.

Kerry Kerstetter

 

Follow-Up:

Thank you for the time to reply at length.  Best,

Q:

Subject: Section 179

Hello Kerry,
I have been searching for the 2008 section 179 dollar limits and your website is the only place I have found an amount.  Would you be willing to share with me where you found this information?

Thank you,

A:

I have also been amazed at how few other professional tax reference services have updated their Section 179 info.  Some, such as the CFS Quick Reference, still have outdated 2007 numbers ($112,000 instead of $125,000).

I posted the new 2008 limit on my blog back in September based on the CCH inflation adjustment calculations.

In October, IRS confirmed all of the CCH figures in Rev Proc 2007-66  which they announced in this press release.

Here is the exact quote from page 14 of that Rev Proc:

.20 Election to Expense Certain Depreciable Assets. For taxable years beginning in 2008, under § 179(b)(1) the aggregate cost of any § 179 property a taxpayer may elect to treat as an expense can not exceed $128,000. Under § 179(b)(2) the $128,000 limitation is reduced (but not below zero) by the amount by which the cost of § 179 property placed in service during the 2008 taxable year exceeds $510,000.

I hope this helps.

Kerry Kerstetter

 Follow-up:

Thank you very much.  I actually did look at REV PROC 2007-66 but not in much detail since it seemed to look more for individuals and not for businesses. 

Q-1:

Hi,

Very impressive website. I have a question and would be grateful if you can help.

I am an independent contractor on the side and also have a full time job. My independent contractor job pays me without tax deductions and I am expected to pay my own taxes. I have made about 15,000 this year. I am thinking of buying an SUV that meets the IRS rating of over 6000lbs for my independent contractor job, but I am worried that I might not have made enough to deduct the 25,000 IRS deduction. Can I add  my AGI from my full time job to qualify for this deduction or is there another way of doing this. 

 

thanks.

A-1:

I have covered this point on several occasions.

It is possible to use other kinds of earned income, including from W-2s, to allow a higher Section 179 deduction than just the net income showing up on your Schedule C. 

However, this is not something you should try figuring on your own.  You need to be working with a professional tax advisor, who will be able to help you properly avail yourself of the hundreds of tax issues that you would most likely screw up on your own.  Any good professional tax advisor will save you much more in taxes than his/her fee; so you would be nuts to tackle your 1040 by yourself. 

Likewise, a good tax advisor may see that it would be advantageous for you to operate your business in a corporation instead of as a Schedule C sole proprietor, another topic I have discussed on countless occasions.

Good luck.

Kerry Kerstetter

Q-2:

Hi,

Thank you very much for your reply. I checked your website for tax pros in North Carolina but none was listed. Do you know of any in North Carolina. Thanks again.

A-2:

Those are the only names I have.

As I have said in my tips for selecting a tax advisor, as well as in countless blog posts, choosing tax pro merely based on geographical proximity is misguided.  A good tax pro could be anywhere in the country and give you even better service than someone who happens to be right next door to you. 

Good luck.

Kerry