Q:

For 2007 the 179 deduction threshold is $125,000 correct??  What happens after the threshold can it be carried forward next year??

 

Thanks

A:

I do have a chart of the Section 179 limits for every year from 2002 to 2011 on my website. 

If I understand your question properly, you are asking if a business buys more than $125,000 of new equipment during 2007, can the excess be carried over to 2008 and applied against the $128,000 limit for that year?

The answer to that is a very big NO.  The 2008 Section 179 deduction may only be claimed for equipment purchased and placed into service during 2008.  Any excess of 2007 asset purchases over the $125,000 limit will have to be depreciated normally.

An additional twist to this situation depends on how much more than $125,000 of new equipment was purchased during 2007.  If the total of new equipment acquired during the year is over $500,000, the $125,000 limit for the 2007 Sec. 179 deduction starts to be phased out.

I hope I understood your question properly.  If I missed your point, please clarify it for me.

Kerry Kerstetter

Q:

Subject: Section 179

 

Questions:

 

If a company begins in November 2007 can the section 179 be taken in the 2008 calendar year???

 

Thanks

A:

Your question is a bit vague, so I’ll see if I can hit on what you’re after.

If you’re asking if a calendar year business buys new equipment during 2007, can it claim the Section 179 expensing deduction for that equipment on its 2008 tax return, the answer is NO.  Equipment acquired and placed into service during 2007 must be claimed on the 2007 tax return.  Equipment acquired and placed into service during 2008 will be claimed on the 2008 tax return.

I’m assuming your question has to do with the fact that there won’t be enough net income on the 2007 tax return to justify any Section 179 deduction, so it would be better suited to 2008 when you will be receiving more income.  As your professional tax advisor should be explaining to you, you can probably get the same effect as you desire by actually entering the full Section 179 on your 2007 tax return.  The tax program will then apply the income limitation test, which will make all or most of the Section 179 carry over to the 2008 tax return, where it will be available to be offset against the 2008 net income.

Another possible scenario would be that you have a new C corp with its first fiscal year ending some time in 2008, such as September 30.  In that case, any new business equipment purchased and placed into service by 9/30/08 will be eligible for Section 179 on that tax return, which will technically be a 2007 1120.

I hope I addressed your point.  Your professional tax advisor should be able to give you more relevant advice, better suited to your actual circumstances.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry:

 

Yes, you have answered my question.

 

Thank you very much

 

 

Q:

Subject: Arkansas Section 179 Depreciation

 

Hi, Mr. Kerstetter –

 

Does Arkansas tax code recognize Section 179 Depreciation the same as the US IRS, i.e., can the depreciation be taken in the same year in the same amount, AR=US?

 

Thanks for considering my question.

A:

Like a lot of states, Arkansas has never conformed with the big jump in the Federal Section 179 deduction that took effect in 2003.  Since 1/1/03, the maximum annual Section 179 deduction for Arkansas income tax purposes has been steady at $25,000.  It’s not even adjusted for inflation, as the IRS maximum is.

When we deduct more than $25,000 as Section 179 expensing on a Federal return, an adjustment must be made to the Arkansas amount.  This requires us to have two separate sets of tax depreciation schedules; one for IRS and another for DFA.  It also means that the adjusted cost bases for assets on which Section 179 has been claimed are probably different for Federal and State tax purposes, affecting future depreciation deductions, as well as any gain or loss calculations on the sale of those assets. 

To make matters even more complicated, the carryover bases of traded assets on which Section 179 has been claimed, such as vehicles, becomes ever more divergent between Federal and State with each trade.

Kerry Kerstetter

Follow-Up:

Hi, Kerry –

 

excellent

 

thank you, sir!

Q:

Subject: Disposal of 179 asset

Kerry,  I used 179 deduction in 2005 to purchase an RV that I use for business purposes.  I plan on “upgrading” to a larger RV and trade the original one in on the new one.  What are the tax implications?  Will I be able to take an additional 179 deduction on the new RV?  The old RV cost $103,000 and I should be able to trade it in for about $75,000.  The new RV list price is $225,000.  I file a schedule C and have other income from other sources ($450,000) other than the Schedule C income.  Thanks for your help and I love your Blogs.

A:

I have discussed this very topic in a number of previous blog posts, so I will only give the quick and simple answer.

Only the new investment in business equipment would be eligible for the Section 179 deduction.  In your case, that would be the additional $150,000 ($225,000- $75,000) that you would be paying for the new RV, assuming it is going to be used 100% for your  business.  How much you can actually deduct will be subject to the various other limits, such as applicable earned income and total investments in Section 179 property for the year.

If you’ve been reading my blog for long, you should be able to anticipate my biggest concern in your situation.  Why are you asking a stranger on the net for this kind of advice instead of your own personal professional tax advisor?  That is very scary and frankly reckless for someone earning $450,000 per year. 

You need to start working with a tax pro ASAP and before you buy the new RV because there are some very simple tricks that can be used to allow you to very easily double the amount of your Section 179 deduction from the current maximum of $125,000 for 2007 to $250,000 by using a C corp to acquire some of the new business equipment.  If you’re running all of your income through a single 1040, you are grossly overpaying your taxes.

Good luck. I hope this helps.

Kerry Kerstetter

Q:

Subject: please help

can you give me he formula on how to figure the 179 tax deduction of a 6,000 lb suv

let’s say that I purchase this year (2007) a new H2 for $70,000 dollars

can you walk me thru the total deduction?

any help would be great – thank you

A:

The amount of your Section 179 deduction will depend on the business usage of the vehicle based on miles driven, as well as your qualifying earned income.  This kind of calculation is not something that can or should be done on your own. 

If you seriously need to know the tax benefits before you buy your new H2, you should have your personal professional tax advisor crunch the numbers for you.

If you don’t have a personal professional tax advisor, you need to get one ASAP.  Any business making enough money to afford a vehicles as expensive as that H2 is in serious trouble if you are trying to handle all of the tax and financial matters on your own.

Good luck.

Kerry Kerstetter

Q:

Question about Section 179 Deduction

Dear Kerry – This is in response to an answer you posted regarding the ability to use Section 179 deduction amounts against wages.

1) If you have both business income and wage income, but the business income does not allow you to use the full Section 179 deduction, can you use the remaining dedution amount against wage income?

For instance, if you purchased an automobile for $10,000 and use it 50% for a business which you own, then you would have the right to a $5,000 section 179 deduction.

If however you could use only $2000 of this available deduction amount on Schedule C, then could you use the additional $3,000 as a deduction against wage income on Schedule A — in the same year, same tax return?  

2) As a separate but related question, if you cannot use the Section 179 deduction on Schedule C at all, are you required to use the available Section 179 deduction against wages in the same year the car was put into service… or can you carry the deduction forward to a Schedule C in a future year at your own discretion?

I hope that these questions are written clearly and I very much appreciate any advice you may have the time to offer!

With many thanks, 

A:

The interplay between the allowable Section 179 deduction and the taxable income limitation is trickier than you think and is not the kind of analysis you should be doing on your own. 

For example, the way the taxable income limit works is that it is very possible to have a Section 179 deduction create a large net loss on Schedule C.  The actual deduction is required to be shown on the schedule for which the asset was used.  In your case, if it was used for your Sch. C business, that is where the full allowable Section 179 would be shown, even though W-2 income may be what actually allows the deduction.

Another possible mis-statement that you need to clarify is the weight of the automobile.  If it is under 6,000 pounds GVW, the allowable Section 179 deduction is much less than for a vehicle weighing more than that.  Since you specified an automobile and not a truck or SUV, I wasn’t sure you understood that important distinction, since most autos weigh much less than 6,000 pounds.

I hope this gives you the sense that you are in dangerous territory trying to do this kind of tax planning on your own.  You should be working with a professional tax advisor who can show you with real numbers how such deductions would work out on your tax returns.

Good luck.

Kerry Kerstetter