Q:

Subject: Section 179

Hi,

Is there a Section 179 phaseout on the # of employees a business has?

 

Thank you,

A:

No. There has never been a direct link between Section 179 and the number of employees. 

It is generally assumed that companies too large to be eligible for this special “small business” tax break will automatically lose it via the $450,000 of new property rule.

Kerry Kerstetter

Q-1:

Subject: Vineyards and Section 179 depreciation

Hello —
According to your website Vineyards are eligible for section 179 expense election.

However, the IRS is taking a opposite position. Can you please provide me with your reference.

THANK YOU.

A-1:

That list of qualifying assets was from the QuickFinder Depreciation Handbook. I just checked the online version of that handbook and it is still included there.

I also just checked IRS’s Publication 946 and don’t see any mention of vineyards not being eligible. Where exactly did you see that IRS doesn’t allow it?

Kerry Kerstetter

Q-2:

Kerry — email me with your fax phone number and I will fax you the IRS article. It is from a July 2006 Farmer publication. And, there is a very recent court case that reinforces that Vines are considered land improvements and NOT eligible for 179. I am a CPA in the Sonoma Wine Country, and this is a HUGE item in my practice…

A-2:

I would like to see a copy of that article.

I’m curious to see whether it cites an actual IRS regulation or is just someone’s opinion as to the applicability of Section 179. I haven’t actually prepared any tax returns for any vineyards; so I can’t say that I have seen it actually be accepted by IRS. Since relocating from the Bay Area, most of our Schedule F clients are involved in beef and poultry production.

However, Vineyards have been listed in the QuickFinder books for several years as qualifying for Section 179 and my experience has been very good with the accuracy of the QuickFinder books for the 20+ years I have been using them. In fact, I have frequently used copies of pages from the QuickFinders books when defending positions we have taken in cases under IRS audit and Appeals and they have been accepted as valid every time.

Thanks for sharing that article with me.

Kerry Kerstetter

Q-3:

Kerry —

I just faxed you the IRS article on farmers about Code Section 179.

Below is a link to the recent court case, where on page 26 this position is again referenced.

I am 100% confused….as I believed that Section 179 was re-written and the definition of Section 179 property was the old Section 38 (ITC definition).

I am not a tax attorney, and I am very concerned about this issue.

A-3:

Thanks for faxing that clip from the IRS website and sending the link to that Tax Court case.

I do find it quite interesting that they are relying on such an old Revenue Ruling, from 1967. It has always been my understanding as well that Section 179 assets are the same kinds that would have qualified for the Investment Tax Credit under Section 38. This had most often hinged on the items being movable rather than affixed permanently to real property.

Reading the Revenue Ruling, I noted that it actually only refers to trees and not to grape vines. Since mature trees, with their larger and deeper roots, are less movable than are grape vines, it would be much more difficult to apply Section 179 to them.

The Trentadue court case you sent seems to be addressing established vines that are acquired as part of an overall property purchase. Claiming that 100 year old vines are movable does become more difficult than to apply that distinction to new vines that are being planted for the first time.

As I said before, I haven’t really had any need to investigate this issue this deeply before. It is a very interesting question, and I hope that other readers of my blog who have some real world experience with applying Section 179 to grape vines will be willing to share any additional info and insight they have.

Kerry Kerstetter

Q-1:

Subject: Yet another Section 179 question

 

We bought into a husband-wife partnership on 1/1/06.  The wife was a passive partner and withdrew and we paid the husband ½ of the FMW of the assets plus an amount for goodwill.  My husband and his partner are both active partners.

 

We are wondering if you can depreciate the physical assets of the company (not the goodwill, of course) given that they elected to do the 754 stepped up basis.

 

I don’t see a prohibition against applying 179 to 754 assets, but I don’t see it spelled out anywhere either.  The accountants are willing to file an amended return if they can find some definitive proof one way or the other as to whether or not we just bought an interest in the partnership or if we bought into the assets of the company.

 

I did find revenue ruling 99-5 that talks about a single person entity selling a partnership stake where the IRS treats the new partner as buying ½ of all the assets and then immediately contributing those assets to the partnership in exchange for interest in the LLC.  Does that also apply in our case?

 

Thanks – your blog is great.

 

Regards,

A-1:

I’m in the middle of the April 17 crunch, so I don’t have time to do much actual research on this.  However, I have mulled it over for a few hours and my gut feeling is that I would not feel at all comfortable in claiming any Section 179 on your new buy-in to the partnership.

If you and your husband had purchased the assets from the partnership and placed them into service under your own personal names, the situation would be quite different.  As it is, I agree that you acquired an interest in the partnership and not direct ownership of business equipment, so no 179 is appropriate.  You do need to keep track of the amount of your personal basis in the partnership, but that doesn’t entitle you to any more Section 179 than the partnership as whole can claim.

Another strike against you is the fact that Section 179 is only available for the first year an asset is placed into service.  You were obviously buying into assets that had been placed into service prior to 2006 by the partnership, so your 2006 purchase doesn’t qualify as first placed into service.

I’m sorry I didn’t have the answer I know you were hoping for.

Good luck with your partnership. 

Kerry Kerstetter

Q-2:

Hi Kerry,

 

I didn’t figure you’d answer my question – we’re going to revisit it this summer when we actually have time (as will the accountants presumably) later this spring.

 

Our attorney in the process thought what had happened was that we bought 1/2 of the assets from the practice and put them into our service during 2006 – he believed that since we could depreciate the assets, we could also claim the 179 deduction.  He thought the only sticking point would be the used status of those assets though.

 

It’s an interesting theory and it’s odd that there isn’t more definitive stuff out there (at least what we could find) as to the yes or no of the issue – you’d think there’d be a statement/ruling that said, yes you can apply 179 to 754 assets, or no you can’t.  We’re not interested in being the test case, and since we’re not losing anything in the long run (unless they change the laws) we’re fine either way.

 

Thanks for taking the time to mull it over.  Good luck in the final crunch!

 

Regards,

A-2:

Section 179 can be claimed on used assets; so that was never a concern of mine.

Maybe I misunderstood the situation as to the new ownership of the assets.  I assumed they were still going to be showing up on the partnership’s books and depreciated there.  In that case, no new Sec. 179 would be appropriate.

If, on the other hand, you and your husband have personal ownership of those assets and are setting them up for depreciation in your own business, separate form the partnership, a much better case could be made for your being allowed to claim the Sec. 179.

After the tax season crunch, your tax advisors should be able to better evaluate the proper way to handle this.  I assume you have filed an extension in order to give yourselves time to straighten this out.  It would be very dangerous for you to actually file your 1040 now without the Sec. 179 and then later try to file an amended return to claim it.  An amended return would result in much closer IRS scrutiny than holding off and filing an original return later on.

Good luck.

Kerry

Q-1:

Subject: Section 179 Deductions

Tax Guru:

My partner and I each have a Section 179 depreciation deduction of 57,000 on our K1’s. The business had an ordinary loss of 7,500 for TY2006.  My wife and I have ordinary income of $125,000 for 2006.  Can I deduct the 57,000 on my tax return? 

A-1:

It sounds as if you tried to prepare your own 1065 because the size of that Section 179 in relation to the net income seems out of whack.  Unless you have properly addressed the Section 179 limit at the 1065 level, which does include adding back some things, such as guaranteed payments to partners, there is a good chance that the K-1 info is wrong.  You need to have a professional tax preparer bless that 1065 before you try to use its items on your 1040s. 

Assuming the $125,000 you mentioned was Earned Income (not from investments and capital gains), and the 1065 was prepared properly, you should be able to use the full amount of the pass-through Sec. 179 on your 1040.

Again, you need to have a professional tax preparer work on your 1040 as well.  If you try to do it all on your own. you are almost guaranteed to screw things up and get yourselves into trouble with IRS.

Good luck.

Kerry Kerstetter

Q-2:

Kerry: 

 

I may have confused you a little regarding my information. My wife and I have W-2 income from full time jobs.  I am a partner in an LLC which is a contracting company.  We purchased 8 new vehicles this year and our K-1 was prepared by a CPA (not mine).  The purchase of the vehicles has balooned our 179 deduction.  My question was posed because my accountant indicated that I could only use the 179 deduction to offset earnings in the LLC not against ordinary income. 

A-2:

Technically, any Section 179 you have can be used against any earned income on your 1040, even that from occupations other than those that produced the Sec. 179.

However, I am still concerned that the LLC’s 1065 may have been prepared incorrectly.  If it had been calculated properly, all of your pass through items should net out to zero, with your share of the Section 179 offsetting your share of the company’s net income and your guaranteed payments.  You really shouldn’t have a case where the other net income from the LLC wasn’t enough to soak up all of the Sec 179.

If the 1065 was prepared by hand, that points to your problem.  Most professional quality tax prep software wouldn’t allow too high of a Sec 179 to be taken for the year.  You should have your personal accountant review the LLC’s 1065 to see why the Sec. 179 expense is so much higher than your share of other income passed through.  I’m guessing that the LLC’s CPA screwed up and the 1065 will need to be amended.

This will obviously also affect the tax situation for your LLC’s co-owner; so neither of you should send in your 1040s until this is straightened out.

Another word of warning.  Because of the rise in the use of LLCs and S corps, IRS is paying much closer attention to what figures owners report on their 1040s.  So if you were to report an erroneously high pass-through Sec. 179 on your 1040, I would put the odds as very god that your entire 1040 would be pulled for an IRS audit.

Please let me know what your personal accountant finds when he reviews the 1065.

Kerry Kerstetter

Q-1:

Subject: Section 179 – Automobile question

 

Mr. Guru,

 

In reading your site regarding the Section 179 deduction, you mention that a “business vehicle weighing in excess of 6000 pounds qualifies for the full deduction.”  Does that mean any/all vehicles over 6000 pounds or just trucks & SUV’s?  I also saw in your section for property that qualifies for the section 179 deduction that you listed automobiles, trucks, & SUV’s separately as if they all qualify for this deduction.  I just want to make sure that I understand the rule correctly.

 

I thought that only trucks & SUV’s qualified for this deduction, ie…automobiles did not qualify because they were considered “luxury automobiles” & the only exceptions for this were trucks & SUV’s.

 

I hope your website is accurate because I would like to make a new purchase of a Bentley GTC which is an automobile which has a GVWR of almost 6400 pounds.  Please tell me it qualifies for the Section 179 deduction because I will be using it for business abou 90% of the time.  Then please tell me the “50% bonuse depreciation” situation will get extended & then my $200K automobile will be one nice deductible vehicle – right??

 

Thanks for your feedback – the details of the luxury auto rules mixed with the exceptions & the section 179 are just little too confusing for the non-tax pro.

A-1:

The luxury car rule that limits the amount of depreciation that can be claimed for a vehicle is based on the weight of the vehicle, regardless of what kind it is.  Any vehicle with a gross vehicle weight over 6,000 pounds is exempt from it.  It has always been that way, since the initial conception of the luxury car rule.

I can still recall back in 1984, shortly after the luxury car rule was first enacted.  I was walking through the parking lot of a financial planning firm in Danville, CA, where I was scheduled to give a presentation on the rules for business expense tax deductions, including vehicles.  In the parking lot, I passed by a relatively new Rolls Royce parked next to a brand new Porsche.  When I was covering the new luxury car rules for depreciation, I explained that the person with the Rolls, because it weighed much more than 6,000 pounds, was able to depreciate its full $200,000 cost over five years, while the Porsche’s owner was only allowed to deduct about $13,000 over the first five years, with the rest of the car’s $80,000 price deducted at about $1,300 per year. 

This was before Section 179 existed, but when that special tax break came around, the same 6,000 pound break point was still in effect in regard to how much could be claimed for vehicles.

In regard to your Bentley, it obviously is not covered by the luxury car rules for regular depreciation.  However, for Section 179 purposes, you need to work with your personal professional tax advisor to see how much you can claim.  While it may not be an SUV in the normal understanding of that kind of vehicle, if you read the tax code’s definition of an SUV in this blog post, it looks like your Bentley is covered and would thus be limited to a Section 179 deduction of $25,000, with the remaining cost depreciated over five years.

I hope this helps.  Your personal professional tax advisor can obviously give you more specific numbers for your unique circumstances. 

Good luck.

Kerry Kerstetter

Q-2:

Thank you so much for taking time to respond.

 

I too believe the new language “limiting” the Sec. 179 deduction to $25,000 on SUV’s & all other vehicles would limit the Bentley to $25K because it doesn’t fall within the additional exceptions – that is why it would be great to get the addition 50% bonus depreciation extended because that would mean about another $100,000 deduction in the first year – wow, wouldn’t that be great.

 

Since writing my email to you, I have found another interesting option which you might find helpful for yourself or some of your clients with the resources & need for expenses.

 

There is a new truck which is just making its way onto the market.  It is called the International MXT which is a Hummer type vehicle with a 7 foot bed.  The gross vehicle weight rating is just over 14,000 pounds which should exempt it from all of the tax rule restrictions – right.  If I’m right about this, then I could buy one of the “limited edition”MXT’s which costs somewhere around $125,000, & I could basically write off the entire amount in the 1st year – right.  I would get the max 179 deduction of 108,000 or whatever it is for 2007 & then have the remaining amount depreciated at the 5 year rate.

 

All good choices!!  Are you still taking on new clients?  Do you help clients in California?  I have a very unusual set of circumstances which will likely make my 2007 income several million dollars & I have the ability to develop whatever structured companies might be helpful in taking the fullest advantage of our tax laws – I just don’t know enough about the laws to help myself without a great advisors.  If you would even consider helping me – I’ll fly to you wherever that is to further discuss some options.  I’m reading about Nevada corp’s, offshore companies, etc….to see what legal options might be available.

 

Thanks again for your time and consideration.

A-2:

I remember posting a link to that huge truck a few years ago on my blog.  My warning from then still applies now.  Buying anything, including a humongous gas guzzling vehicle, strictly for the tax write off is not a financially wise move. 

In regard to taking on new clients, nothing has changed; so I have to pass along the same reply I send to several people each week:
…

 

  

Q:

Subject: Section 179-Are assets used in commercial rentals eligible for the Section 179 deduction?

 

Good Afternoon TaxGuru,

 

TurboTax allows me to take a Section 179 deduction for tangible, personal-property assets used in my commercial rental activity.  It does not allow this treatment for residential rentals. 

 

Here’s my problem.  I can’t find anything in Publication 946 to support TurboTax’s position, but find it difficult to believe that this huge company could make such an error.

 

My accountant says I can’t take the Section 179 deduction; TurboTax says I can.  Would you please steer me to the relevant IRS regulations and rulings? 

Perhaps you could add it to your online article about the Section 179.

 

Thank you kindly.

A:

You are approaching this bit of research into the Section 179 law from the wrong perspective if you expect it to specifically spell out every single possible type of asset that would qualify for first year expensing.  That isn’t how most laws are written.

It’s been almost 35 years since I took Business Law in college, so I don’t remember the specific legal term; but I do recall the concept that most laws allow certain things in a broad sense and any exclusions from that coverage are required to be specifically stated. In other words, if a law says movable business equipment can be expensed in the first year, we start from the premise that this includes everything.  Then, the law and regulations specify certain things that are not to be covered by this law.

As you have most likely already seen, most descriptions of ineligible property include the following:
   “Used predominantly to furnish lodging or in connection with the furnishing of lodging (with the exception of hotel/motel operations).”

If the law were intended to rule out property used in any kind of rental activity, it would say so and not make the very definite distinction of only mentioning lodging (aka residential).  By only mentioning that kind of rental activity, it allows us to operate under the assumption that otherwise eligible property used in any other kind of rental activity would not be ineligible.

There is also the fact that, for as long as the Section 179 deduction has been in existence, landlords of commercial properties have been claiming it for many kinds of equipment used in conjunction with those rentals and IRS has not had any problems.  Many of my clients are commercial landlords and I frequently use Section 179 on those rental schedules, and IRS has never once disallowed it.

I realize this may not be as detailed an answer as you were hoping for; but it’s the best I can come up with during this heavy crunch time.

I hope it helped you understand this issue a little better.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry:

 

Thank you for your excellent advice.  You  answered my question and taught me an entirely-new-way-of thinking.

 

This is an incredible gift.  I will revisit your site regularly to check out your advice and watch for client openings.

 

Thanks again.

 

Your raving fan,

Q:

Subject: Section 179 truck depreciation question

Dear Kerry,
  I have a tax question I’m hoping you can help me with.
     We bought a truck in 2006 for our business and are going to section 179 depreciate it’s value for the next 5 years. If I deduct $5000 (depreciate) it’s value this year, can I deduct more next year, (in the event we make more money and I need more deductions.)
    Is the depreciation set once you place something in service? Is there anyway I can increase the amount on the second or third year?
        The truck cost 22,000 dollars, so it’s be nice to depreciate it just enough each year so as to not have to pay taxes. So maybe $5000 this year, and $6000 the next, but maybe only $3000 the third year. Is this possible?
         Please let me know ASAP as taxes are due soon.
                     Thank You,

A:

You can’t just change the depreciation methods and amounts each year.  There has to be a consistency.

That said, there are a number of ways in which you can depreciate the truck.  For example, you can use straight line or accelerated regular depreciation.  You can claim part or possibly all of the cost of the truck as Section 179.  If your taxable earned income rules out an actual current year full deduction, the excess Sec 179 can be carried over to be used on the 2007 4562, and so on.

You really need to be working with an experienced tax professional because it is obvious that you are guaranteed to make mistakes that could cost you tax dollars, as well as get you into trouble with IRS. Handling the tax matters on your own is absolutely crazy.

In regard to the tax returns deadline, you are not likely to find a good tax pro in the next two weeks because we are all already swamped.  You should do your best guesstimate of how much you will owe with the 2006 tax returns and send that in with an automatic four month extension in order to give yourself adequate time to locate and start working with a tax pro. 

Good luck.

Kerry Kerstetter

Q:

Subject: appreciate your advice=sec 179

Dear Sir,

 

Greetings to you

I heard of your good name.

 

Appreciate if you can kindly advice me if my purchase of a condo($25,000) for business office can be claimed as sec 179?

 

Thanks

A:

Real estate for offices has never ever been considered eligible for Section 179 expensing. This special deduction has always been pretty much limited to movable business equipment.  For example, a motorhome used as an office would qualify, but a permanent structure would not. 

I have a lot of info on what kids of things do and do not qualify for Section 179 on my website. 

Better still, you should be working with an experienced professional tax advisor.  The fact that you could even consider claiming Section 179 for an office condo makes me very worried that you are going to get yourself into some very deep doo-doo with IRS if you continue to take the reckless and irresponsible path of navigating tax issues on your own.

I hope this helps.  Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your advice.

I am planning to seek help from a CPA for my tax return

 

Regards

Q:

Subject: 179 / 208A question

Dear Kerry aka Mr.Tax Guru,

After reviewing your website page.   

 

I have an interplay of 179 and 280A question.
It is my understanding that most storage facilities are eligible for 179. If I sell autos or parts of autos and purchase a garage to store my autos/cars inside of  (storage not attached to house) would this qualify under 179 or would this be a 208A issue?
Thanks.

A:

Your understanding about storage facilities is incorrect.  Only specialized agricultural ones qualify for Section 179 deductions.

A garage or warehouse does not qualify.

You need to be working with an experienced professional tax advisor before you get yourself into big trouble with IRS by trying to use Section 179 on unqualified assets.

Good luck.

Kerry Kerstetter

Q:

Subject: SECTION 179 QUESTION / PARTNERSHIP

 

I’m not quite sure how to post a question to your blog, so email was the best way I could find.  I have a 2 person LLC taxed as a partnership.  I have W2 income from a previous job in 2006 of $85,000.  The LLC’s profit for the year is $10,000.  The capital account of each of the 2 members is $41,000.  I have equipment that I bought for this LLC during 2006 worth $84,000 that I would like expense using section 179.  Is the section 179 expensing limited to my $10,000 in business profit or can I pass it through to my W2 (married filing jointly) to offset the W2 income of $85,000.

 

Thanks,

A:

This is the kind of thing that you need to be discussing with your personal professional tax advisor because it can basically play out two different ways, depending on a key factor that wasn’t very clear in your email.

If the equipment was purchased by the LLC and set up on its books, any Section 179 deduction would be limited by the LLC’s income before even showing up on the K-1s for the owners.

If you purchased the equipment in your personal name to be used on behalf of the LLC, you would be entitled to a much higher Section 179 deduction based on your other W-2 earned income and the other owner would receive no part of that deduction, unless it’s your wife.

If maximum deduction was important, how to purchase the equipment should actually have been discussed with your personal professional tax advisor before buying it. 

If, as it seems, you have been trying to navigate your way through the operation of an LLC without benefit of the guidance of a professional tax advisor, you need to start working with one immediately.

Good luck.

Kerry Kerstetter