Q:

Subject: Section 179 2007 Limit

Hi, I love the website.  I have a quick question regarding the 2007 deduction limit for Section 179.  I see that you note the limit is $125K this year, so do other sites, but the IRS website under 2007 changes notes the limit is $112K.  Is there a quick explanation for the difference?  Is it related to Gulf Zone property?

A:

I covered the 2007 increase in this blog post from May.

I have no idea why the IRS webmasters can’t keep their info properly up to date; but this is another good example of why it is dangerous to rely on IRS for tax info rather than professional tax advisors, who are more current in their knowledge of the tax laws.

Kerry Kerstetter

 
Follow-Up:

Thanks

Q-1:

Subject: re: Section 179

I have a question regarding Section 179 that I seem to be struggling with on getting a straight answer (assuming one exists…)

My wife and I are going to purchase a motor home and would like to supplement financing by leasing it to a third party.
The question I have is, would this be applicable to Section 179 (expensing in 07′) if I purchase before the year end and issue it into service (available for rental)?

There seems to a lot of confusion on this particular topic.  I did find a case where the court ruled in favor of the tax payer, Robert D. Shirley, TC Memo 2004-188.
What is your opinion in this matter and has there been any further clarification by the IRS?

Thanks,

A-1:

I have discussed this very issue in a number of earlier blog posts.

Here is the applicable quote from the QuickFinder Depreciation Online 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.

You really need to be working with an experienced professional tax advisor who can help you work out the most appropriate way to handle this, including what business entity makes the most sense for your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

Thanks for the information.

One follow up question I have as I took your advice on talking to a tax advisor (have appnt. tomorrow).  However she brought up the point that I need to “recapture” any gains I have through the sale of the motor home.  I thought she meant that if I purchase the motor home for 100k and sell it for 80k, I essentially need to claim the 80k as gains on the subsequent filing.  Is this true?

I read (on your blog!) that I only need to claim the difference between the sale and book value…am I reading that right?

 

It is always important to keep tabs on the adjusted cost basis (aka book value) of business assets so that you can know what any potential gain or loss would be triggered by its sale.

Basically, the book value is the original cost of the asset less the depreciation (including Sec. 179) claimed up to the point of sale.  In your case, if you expensed the entire cost of the motorhome, its book value is zero, which means the full amount of any sales price will be taxable at the 25% Federal depreciation tax rate, plus state tax if you are in a taxable state.

Your tax pro should also advise you of some other factors to consider. 

Even before a sale, there is a potential taxable partial recapture of the Section 179 if the asset’s business usage slips below 50% in the first five years after you place it into service.

If you are disposing of the motorhome in order to acquire a newer model, there will be no taxable recapture if you trade in your existing one on a new one costing at least as much as the old one is worth and you receive no cash or net relief of debt.

These are all extremely basic tax principles that any competent tax person should have no problem explaining to you.

Good luck.

Kerry Kerstetter

Q-1:

Subject: 179 SUV deduction

 

Hi Kerry,

 

I’ve been to your web site and blog, thank you for making the information on 179 deductions so easy to understand.

 

I am a consultant with three sources of income for 2007: self-employment, partnership income under an LLC, and W-2 income.

 

Last year I took a 179 SUV deduction on a toyota land cruiser of 25,000.

 

My question for you:

I’d like to find a way to take that nice deduction again in 2007. Can I sell the truck I bought in 2006, then buy another one in 2007 and take the deduction again? 

 

Also, will I face recapturing of depreciation for doing that?

 

lets say this is the scenario:

Paid 28k for the truck on 2006

Sell the truck in 2007 for 29k (toyota land cruisers can appreciate)

Will I owe recaptured depreciation?

29k-28k+25k(the deduction taken in 2007)?

 

Are you able to advise me on federal taxes.  I am in Florida.

 

Thanks!

A-1:

I’m just going to do a quickie refresher on this topic because I have covered it in more depth in numerous previous blog posts.

Basically, if you sell your current vehicle, you will have a taxable gain, which will be whatever your sales price is less the adjusted cost basis of the SUV (cost minus Section 179 and depreciation).  You can go out and buy a new one and claim a new $25,000 Section 179 on your 2007 tax return; but that will be less than the taxable gain from the sale.

A more tax-savvy maneuver would be to trade in the old SUV on a new one.  There is no taxable gain; but you can only claim a new Section 179 on the additional cost of the new vehicle after the trade-in allowance you are given.

If I’m not mistaken, a Toyota Land Cruiser is an SUV and not a truck; so it has a lower maximum Section 179 than a truck would have.

Remember also that business vehicles are just one type of asset that qualifies for the Section 179 expensing deduction.  You can buy other kinds of business equipment and deduct their costs without having to sell your existing SUV.

This is a very basic tax matter and illustrates how dangerous it is for you to continue to try to run your business and tax matters without the assistance of an experienced professional tax advisor.   You should start working with a tax pro ASAP.  You may even want to give potential tax pros this issue and see how they address it before making your selection.

Good luck.

Kerry Kerstetter

Q-2:

Thanks Kerry

 

I’ll seek out a tax professional.

 

Can I buy antique office furniture for my office and expense that under 179?

A-2:

As long as you actually use the furniture in your business and not just as an investment, it should qualify for Section 179 expensing.  I have a lot of info on what kinds of assets do and do not qualify for Section 179 on my website. 

You should always remember that, if you expense the cost of the furniture, its cost basis for you will then be zero.  Any sale of those items will then create a taxable gain for the full amount of the sales price.  Likewise, if you give the furniture to someone else, that person will assume your same zero cost basis. 

These are all issues that should be handled along with a professional tax advisor.

Good luck.

Kerry Kerstetter

Follow-Up:

Great Thanks!

 

Wish you were taking on more clients.

Q:

Subject: section 179 for SUV

In 2007 do you know if you can still expense $25000 of a vehicle with GVW over 6000 pounds under the Small Business and Work Opportunity Tax Act of 2007?  Thanks 

A:

That rule has not been changed. 

The only change in the new tax law is to raise the overall maximum Section 179 from $112,000 to $125,000 for 2007.  The special $25,000 limit on SUVs was not modified.

Kerry Kerstetter

Follow-Up:

Thank you

Q:

Subject: Section 179 relative to equipment leasing

Can the taxpayer benefit from the section 179 deductions if the equipment is financed?

Thanks,

Just reviewed your comments about equipment leases relative to operating leases

A:

If equipment is actually purchased, how it is paid for (cash or loan) is irrelevant. 

With leases, it’s a little trickier.  Capital leases (aka disguised purchases) can often qualify for Sec. 179, while operating leases don’t.

I’ve covered this issue rather extensively on my Section 179 page.

Kerry Kerstetter

Follow-Up:

Thanks Kerry,

I did review your comments on operating leases.

Very informative and useful to our customers!

Thanks again,

Q:

Subject: questions Sec. 179 expensing

Kerry,

Have read your Sec. 179 info online.  But have a couple of questions:

a)  If I expense, say, $70,000 under Sec. 179 for a $100,000 equipment buy, can I straight-line depreciate the remainder (i.e. $30,000)?  Or am I precluded from depreciation if I write off some costs via Sec. 179?

b)  The $450,000 limit.  Is that ALL the equipment i bought in 2007 that qualifies for Sec. 179 treatment, or just the equipment I bought that I am opting to apply Sec. 179 to??  (I.e. — if I buy $600,000 worth of equipment that would qualify for Sec. 179 expensing, but only choose to seek the deduction for $100,000 of the equipment, does the $450,000 limit apply to just those expenses I am seeking to expense, or to the amount of all the equipment i bought, regardless of whether I plan to expense or not????)

thanks for any insight here.

A:

a) Whatever part of the cost basis that hasn’t been expensed under Section 179 is to be depreciated over the appropriate class life and using whichever method (straight line or accelerated) you and your personal professional tax advisor deem best for your unique situation.

b)  Our supreme rulers in DC have decided that any business that has acquired more than $450,000 in new Sec. 179 qualifying equipment will be claiming large enough normal depreciation deductions that they don’t need the full Section 179 expense that “smaller” businesses need. 

Again, if you are spending this amount of money on business equipment and you are trying to do your own taxes, you are taking a very irresponsible risk.  Focus on what you know and do well in your business and retain the services of a qualified tax pro.

Good luck.

Kerry Kerstetter

Q:

Subject: re 2002 2003 sec 179 

Kerry:

in the tristate area for 2002 and 2003, there was a ruling to spur capital investment and businesses could purchase a vehicle and depending on the cost could take $25K + 10% dep + that year’s depreciation.   Can you enlighten me on the nuances of this rule and how to best apply it?

Thanx

A:

This doesn’t ring a bell with me.  I checked in my 2003 references and didn’t see it mentioned.

Are you perhaps confusing that with the special depreciation deductions allowed for New York Liberty Zone property?  This is for almost all kinds of business equipment, not just vehicles and is only for the specific part of Manhattan, not the full Tri-States, and covers assets acquired and placed into  service from 9/11/01 through 12/31/06.

If it’s a State tax break you are referring to, you should check with your state tax agency for more specifics.

I’m sorry I couldn’t be more help.  Good luck.

Kerry Kerstetter 

The Section 179 expensing election is one of the most common topics on which I receive questions; so this is a bit of good news. 

As our imperial rulers in DC love to do when they pass laws to control our lives, they toss in a load of items unrelated to the main purpose of the bill.  The Iraq war funding bill that President Bush signed yesterday has its share of unrelated items affecting businesses.

Bad News: Increasing the minimum wage to screw up the natural supply and demand market forces for labor.

Good News: Increasing the 2007 limit for Section 179 from what was $112,000 to $125,000 and increasing the phase-out for this deduction from the previously COLA adjusted limit of $450,000 of newly acquired equipment to $500,000.

Here is the actual text from Page 179 of the 249 page law.

SEC. 8212. EXTENSION AND INCREASE OF EXPENSING FOR  SMALL BUSINESS.

(a) EXTENSION.—Subsections (b)(1), (b)(2), (b)(5), (c)(2), and (d)(1)(A)(ii) of section 179 (relating to election to expense certain depreciable business assets) are each amended by striking ‘‘2010’’ and inserting ‘‘2011’’.

(b) INCREASE IN LIMITATIONS.—Subsection (b) of section 179 is amended—

 (1) by striking ‘‘$100,000 in the case of taxable years beginning after 2002’’ in paragraph (1) and inserting ‘‘$125,000 in the case of taxable years beginning after 2006’’, and

(2) by striking ‘‘$400,000 in the case of taxable years beginning after 2002’’ in paragraph (2) and inserting ‘‘$500,000 in the case of taxable years beginning after 2006’’.

(c) INFLATION ADJUSTMENT.—Subparagraph (A) of section 179(b)(5) is amended—

  (1) by striking ‘‘2003’’ and inserting ‘‘2007’’,

 (2) by striking ‘‘$100,000 and $400,000’’ and inserting ‘‘$125,000 and $500,000’’, and

 (3) by striking ‘‘2002’’ in clause (ii) and inserting ‘‘2006’’.

 (d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

Joe Kristan has a good summary of these and other tax related changes in the new law on his blog.