Q-1:

Subject: Tax info on your blog

 

Kerry, I found your blog and feel you are the only person I have found who is up on the question I need answered. Here is what I have:

 

First off, I am a Real Estate Broker. I own my own business and work out of my house. (write off a portion for business) I bought a 2004 Nissan Armada in November 2003 to get in on the tax break. It was priced at I think 33,300 but with tax it was around 35,000. My tax person said I got most of the writeoff but not all. I didn’t understand. I don’t think he gave any bonus depreciation if there was any then. He said I can only write off actual expenses such as tires, gasoline, oil changes repairs. Of course, it is under warranty so the expenses are low except gas. I was hoping to get mileage but he says I can’t. Also besides the first year, I got no further depreciation I was told. Again, I am pretty sure there was no bonus depreciation in 2003. Maybe there wasn’t supposed to be, I don’t know.

 

So the one time break was good but now it is hurting me. I called him a couple of weeks ago and asked him how long I had to keep it before I could do it again. And also what is considered to be the useful life? He said I can buy again in 2008 (5 years) and do it again but this is the example I got. If I trade it in on a 45,000 SUV (which I have to have) and get a 20,000 trade-in, I can only write off the 25,000 difference. Thats it. Then I don’t get mileage still. Is there a point, it is said to be at the end of its useful life as far as recapture goes? Or say if I were to sell it, do I have to pay a recapture back? I am not planning on doing that without getting something else as it is a business vehicle. I have 3 others at home to drive. I haul signs etc, and show multiple people so need the 3rd row seating. No way for me to go back to something smaller so I want to take advantage any way I can of tax breaks. The article below said I can write off mileage if I office at home.

 

I found an article on Smartmoney.com that says this:

 

Next, Play the Home-Office Angle

As mentioned above, the lucrative Section 179 write-off is available only when you use your heavy SUV, pickup or van over 50% for business. Your business-use percentage is based on your business and personal mileage.

Unfortunately, this over-50% business-use test can be difficult to pass. You’re much more likely to clear the hurdle if you can also claim a principal place of your business is an office located in your home. Why? Because then all the commuting mileage from your home office to various temporary work locations (client sites, etc.) will be considered business mileage. Ditto for commuting mileage between your home office and any other regular place of business — such as another office you keep in the city. (Frustratingly, if you only have an office outside your home, your drives between home and office won’t count as business mileage.) You can also treat all the mileage between your other regular place of business (that office in the city) and your various temporary work locations (client sites, etc.) as additional business mileage. Source: IRS Revenue Ruling 99-7.

More business mileage also means a bigger first-year Section 179 deduction. For example, a $60,000 heavy non-SUV used 100% business means a $60,000 first-year write-off (100% x $60,000 = $60,000). In contrast, 70% business use cuts your deduction down to $42,000 (70% x $60,000 = $42,000).

Last but not least, your home-office deduction counts as a business write-off as well. As such, it reduces your federal income-tax and self-employment tax bills. And as if that’s not enough, you’ll probably also get a state-income-tax write-off.

All that — plus the option of showing up for work in your pajamas. You just can’t beat it.

Making Your Home Office a Principal Place of Business

So how do you make your home office a principal place of business if you haven’t done so already? The tax law gives the self-employed types (sole proprietor, partner or LLC member) two ways to qualify:

1st Way: You conduct most of your income-earning activities in the home office.

2nd Way: You conduct your administrative and management functions in the home office. However, to take advantage of this taxpayer-friendly qualification rule, you can’t make substantial use of any other fixed location (like that other office downtown) for your administrative and management chores.

For either qualification rule you must use your home-office space regularly and exclusively for business purposes during the year in question.

 

I just feel like since I don’t know exactly how this works, I am leaving money on the table. Maybe I am wrong and am getting correct information, but when I ask, it usually takes me a couple of weeks to get an answer from someone he consults with. He is an auditor for the State of Texas health systems and also does taxes. He was a client of mine I sold a house to years ago so I got him to do my taxes. They were easy and basic at the time. Now they are more complicated and we are making more money. We need as much tax write offs as we can get. Taxes are going to eat us alive this year as we will be hitting probably well over the 200k mark this year. the (including wife making 100k or more)

 

My house is almost paid for and will be paid for this year. That was my goal. It was paid down so low anyway, I didn’t pay that much in interest. Maybe 4,500 a year and going down each year. I still pay taxes and insurance of course and usual business expenses. Sorry for this long message. Again, I was glad to find your blog as I could tell you knew what you were talking about. I am impressed.

 

My wife is upset with me and wanting me to get someone else to do my taxes. It is very awkward and I just need to know this has been done correctly. If you need any more info I can provide it. I am not sure you even answer questions like this. I need these specific answers and not general ones which I have been finding.

 

Plus for 2008 is there the same tax break or would I need to do something this year? Again, my tax guy says 5 years, not sure why as I sell Real Estate and don’t understand this suff. If you can answer these questions or direct me where to go, I would greatly appreciate it.

A-1:

It’s very obvious that you have outgrown your current tax pro and need one who is full time and experienced in working with clients to reduce their taxes, as well as explain simple issues to you like the topic of vehicle depreciation.  There is nothing complicated with any of the topics you raised in this email; so there is no excuse for your tax pro having to find answers from someone else.  Any competent tax pro should know every one of these points off the top of his/her head.

If you are making that kind of money in real estate, the vehicle deductions are small potatoes in comparison to other very easy tax savings strategies that you should be using.  For example, using a C corp could easily reduce your annual taxes by over $20,000.  I have seen this happen with several clients who are real estate pros.  A good tax pro should have no problem finding ways to save you huge amounts of money.  Only you can decide if it’s worth $20,000 a year in easily avoidable taxes in order to not hurt the feelings of your current part time tax advisor.

There are obviously some basic factors involved with your vehicle depreciation that you are very confused about.  As I said, a good personal tax pro will be able to explain these in more detail with your specific numbers; but here are a few key points that seem to be messing you up in your understanding of how vehicle deductions function.

While the cost of business vehicles above what has been expensed via Section 179 is required to be depreciated over five years, there is no minimum amount of time that you have to keep a business vehicle.  You must be misunderstanding your tax guy in regard to having to wait until 2008 to buy a new business vehicle.  You can sell it or trade it in at any time.   I used to have a Realtor client who traded in his vehicles every six months for new ones because the image of new vehicle was more important to him than the thousands of dollars he was losing on each one. 

The tax consequences will be different under each scenario,  Before decoding whether to sell or trade, what is critical to know is the adjusted cost basis of the vehicle; which is generally its purchase price less depreciation and Section 179.  If the sales price is higher than the adjusted cost basis,  you will have taxable gain on the depreciation recapture.   If the sales price is less than the adjusted cost basis, a sale could generate a deductible loss, depending on the business usage percentage.

On the other hand, if you trade in the vehicle on a new one (new to you that is), any gain from the trade-in value exceeding the cost basis is not currently taxable, but reduces the cost basis of the replacement vehicle.  This is calculated on Form 8824.  If your trade in allowance is less than the adjusted costs basis, the loss isn’t currently deductible, but is added to the cost basis of the new vehicle, also on Form 8824.  

As in your example, the Section 179 expensing can only be claimed on the excess over the trade-in allowance because this is the value of the newly acquired asset.  As with any mixed use assets, the deduction can only be claimed for the business usage percentage of the newly acquired value.

Another area of confusion you have is with which method of vehicle expense deduction you can use.  The IRS standard per mile rate includes an amount for depreciation based on the straight line method.  If you choose to claim accelerated deprecation, which includes Section 179 expensing, that vehicle is not allowed to use the standard mileage rate and must continue to use the actual expense method for as long as you own that particular vehicle.   This is quite fair because to allow you to switch would effectively allow you to over-depreciate the vehicle.

I have been maintaining a page on my main website dealing with Section 179, with the annual limits, for several years now.
 
You can see what the maximums will be at least through 2010, subject to any future changes in the tax law.

I hope you find these comments useful. Most important, you need to work one on one with a full time tax professional who can help you save on your taxes.

Good luck.

Kerry Kerstetter

Q-2:

Kerry thanks so much. I really appreciate this and it is alot to absorb. I had a friend who is a home inspector. A few years ago we were talking and he said he formed a C corp. I asked him why and he said he is saving on taxes. We talked further and after we talked, I discovered we made the same exact amount of money that year which was a coincidence. He told me how much he has paid in taxes and said he had very little write offs except miles as his work doesn’t use materials only his expertise. Plus he didn’t advertise. I had tons of deductions and paid twice in taxes what he did. I called my tax guy and he said it would not benefit me to do it. At the time, I wasn’t making a huge amount, just average. I will be making over 100k a year just myself, probably quite a bit more as it usually is. I am at 40k already this year, and my wife makes about 125k. So we will be hitting closer to 250k a year this year on. This opened my eyes.

 

He did tell me I had to wait 5 years to trade but he must have meant in order to not get a big tax penalty. I do need to sit down with someone and learn this stuff so I am more educated about this end since taxes are for sure going to be a huge issue. Here is what I thought:

 

If I trade in my vehicle that I paid 35,000 for say for a 45,000 vehicle and drove it five years (although don’t know where that came from) I know that I took the up front deduction in 2003 for my current vehicle so that was 35k but I have to confirm that as he had told me we didn’t take the whole thing the first year. It has been a while so I need to investigate. I know we haven’t done any further depreciation after year 1. That much I know. I figured after the up front ne time write off was it. I know for a fact that is the only time we wrote anything off on it except actual expenses. Here is what I was wanting to do possibly.

 

I bought in November of 2003 for 35,000 total including tax. I want to buy a vehicle around 45,000 (or more) in 2008. I thought if I wrote the first year off and it sold for say 20k, and I bought a vehicle for 45k, I could take the 25k exemption that year. (the difference) Plus I am not sure how it would depreciate out after that. So this is what I thought. I really didn’t want to trade anyway until 2008. I think he said I would have a huge recapture if I traded any earlier than 5 years so the longer I have it, I guess the less it is worth was his thinking also. And yes, I could have misunderstood some of these things. 

 

You for sure know your stuff and it will hard to find someone so educated about this stuff. I wonder how much money I have lost already. Thanks again, I really appreciate your taking the time out of your busy schedule to answer these questions for me. I will talk to another CPA this week for sure. One that does it for a living.

A-2:

Your tax person is sounding more and more “dangerous” to your financial health with each comment you make.

He is obviously one of the many “tax pros” who are scared and uneducated on how corporations work; so they tell their clients they are a waste of time.  The fact that a properly used C corp could very easily save you over $20,000 per year doesn’t seem to be a concern of theirs. 

The very ironic thing is that C corporations are very easy to work with.  I have gone through this learning curve with several people who have worked for me who were scared of corporations when I assigned them their first ones; and then discovered that they are actually much easier to work on than individual 1040s.

You are still making some misstatements regarding vehicles that I need to clear up for your benefit and that of my readers.  You should have a depreciation schedule showing how much has been claimed in Section 179 and normal depreciation for that vehicle as of 12/31/06.  Subtract the accumulated depreciation figure from the original cost of the vehicle to arrive at your adjusted cost basis (aka Book Value).  If you sell that vehicle for any more than that figure, there will be taxable depreciation recapture.  This applies to a sale in six months or 20 years.  There is no “waiting out” period where you can sell an asset for more than its adjusted cost basis without having a taxable gain.

If the vehicle is traded in, the gain is deferred into the replacement vehicle and not currently subject to tax.  Again, this applies to a trade at any time.

The only actual time triggered issue has to do with a vehicle on which you claimed Section 179.  If you still own it and its business usage drops below 50 percent within five years, you will have to recapture a proportionate amount.  This time triggered issue does not apply if the vehicle is sold or traded within the five year period.

Again, these are all very basis tax concepts that any competent tax pro should be able to explain to you off the top of his/her head.  You need to start working with one ASAP. 

Good luck.

Kerry Kerstetter

Q-3:

Thanks Kerry, For sure I am going to get this resolved this week and have someone professional do my taxes and set me up a corporation. That is not even a question in my mind anymore. Ok, I just pulled the depreciation schedule from 2005 taxes. It has some stuff listed under the part about 179 but I have equipment so I went to page 2 and found my vehicle listed.

1. 2003 Armada it says (it is really a 2004), Date placed in service is listed at 12/12/2004. I placed it in service November 28 I think, of 2003 so I could get the 2003 writeoff.
2. Business use – 96.11 percent
3. Cost or other basis 27,000. Not sure how I got that unless he took my old vehicle I sold my brother for 6,750 and added that to the 27,000 which would be about right. I had the other one 5 years or so.
4. Basis for depreciation – 0
5. Recovery period – 5 years (now you see where I got the 5 years from)
6. Method/Convention – 200DB/HY
7. Depreciation Deduction – 0

He goes to section B and lists my miles but he doesn’t give me a write off for miles. That he has told me. You said that was correct also.

So from reading over this, it seems I got a one time deduction up front of 27,000 in year one and that was it. Now you see where my misstatements came from.

On page one it had listed computer equipment I bought for 179 deduction, no carryover listed in line 10 (carryover of disallowed deduction from line 13)

So now you have all the info. This was 2005 and I bought the vehicle in 2003. I got the 27k up front and that was it. Nothing showing on here unless I am looking at the wrong part but there isn’t much to this and I think I am looking correctly.

Now I guess you can use me as an example of what not to do? Oh and I do have the home office depreciation which is pretty small. I guess when he started this my house was worth less. He has it listed as 175,000 including land. Basis of building 165,000. Actually our market is up and my house is worth around 275,000, not 175,000. Still I don’t care as much on the home office as I won’t be here but maybe another 5 years and am not keen on giving that money back when I sell. It is a case of pay me now or pay me later isn’t it?

A-3:

So, this proves that your Armada’s adjusted cost basis is zero.  This means a sale for any amount of money at any time will result in taxable recapture of Section 179.  A trade-in at any time will not trigger any taxable recapture.

Any time you buy a new piece of business equipment, such as a vehicle, you have the choice between deducting its full cost in the first year under Section 179 or spreading the cost deductions out over the item’s useful life.  You obviously chose the quickie first year deduction for your Armada.  The trade-off for that decision of yours was zero depreciation for the rest of the time you own that particular vehicle.  This should have been explained to you by your tax advisor before you submitted your 2003 1040.

While you may no longer be entitled to any depreciation on this vehicle, you can still deduct its operating costs, prorated to the business usage percentage.

Don’t fall into the trap of buying things that you don’t really need just for the deductions.  That is just plain counter-productive (aka stupid) because the tax savings don’t fully reimburse you for the amount you had to spend. As long as the vehicle is doing its job, keep it. When it is no longer suitable for your needs or becomes a “money pit,” you should trade it in on a new one.

In regard to your home depreciation, this can only be claimed based on your actual cost basis in the home.  Any appreciation in value while you own it is completely irrelevant for depreciation purposes.  It only becomes a relevant issue when you sell the home. 

Your new tax advisor should explain to you the principles of basis for tax purposes. 

I am sure that your experiences are not unique and hopefully this exchange will help others in a similar situation as yours.

Good luck.

Kerry

Follow-Up:

Well at least he did this part right. I knew it would be done up front. He told me that part. This really answers all of my concerns. Now I don’t have any incentive for trading next year as I love my current vehicle and unless something happens, I would like to keep it. So I just need to not sell it and when the time comes, just trade it in to avoid triggering a recapture. I don’t need an extra vehicle but I guess if I did drive it a few more years and then just keep it and buy a new one, it works the same way. This isn’t an issue though as I won’t do that.

 

I am deducting operating costs as he told me this. Gas, oil changes, everything else to do with it. Just not mileage. Now this all makes sense so he didn’t do everything wrong after all. He still should have helped me set up the C corp. That alone is huge. 

 

On the home depreciation part it seems he got that right also. I understand now that the appreciation doesn’t matter. Trading in not triggering a recapture is great if I need to do it as I guess I just write off the difference between what I wrote off (27,000 one time) and the new vehicle of say 45k. So in this instance 18k I can write off again. That is still good. You are right. It is foolish to trade for the sake of trading. I was actually thinking about it as I thought it would benefit me tax wise. Now I see. Again, I really appreciate your taking the time to explain this to me. It all makes sense now. I think this topic for sure would help others as you have been so thorough.

 

Q:

Subject: Section 179

I read with interest your page on Section 179 deductions.  It doesn’t mention where to put the deduction found on line 12 of form 4562.  Many of us that expense simple items like computers need to know where to transfer the line 12 deduction.  Can you help please?  Thanks.

A:

The Section 179 amount is added to the regular depreciation expense and shown on the 1040 schedule where the particular asset is being used. This could be C, F, E, or A.

You really should be working with a professional tax preparer whose knowledge and software will ensure that the Section 179 is handled properly.

Good luck.

Kerry Kerstetter

Q-1:

Subject: Looking for Section 179 2007 Number

 

Dear Mr. Kerstetter:

 

I am interested in finding the upper dollar limit for 2007 Section 179 property. In 2005 the upper limit was $525,000 and in 2006 it was $535,000 — do you know the limit for 2007?  I understand that presently the rules change for 179 in 2008 and upper limit will be $200,000 (b/c max section 179 deduction drops back to $25,000). Thanks for your help, I saw your article on the web in looking for a source for this number. I had no luck in IRS sources. Thanks in advance for any help.

 

Regards,

A-1:

Your info is out of date.  A tax law was passed last year extending the fall-back in Sec 179 amounts to 2010.  I have had this on my website since the day that law was enacted.
 
In regard to the phase-out, check the numbers at the bottom of the above referenced page.  For 2007, it starts at  $450,000 and goes until $562,000, with the $112,000 maximum deduction allowed for 2007.

These numbers will be adjusted upwards for 2008 and 2009 based on the official cost of living calculations, before dropping in 2010 if our rulers don’t extend it again.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

 Dear Mr. Kertstetter:

Thanks so much for writing and the information this is what I was looking for. Especially thanks for updating  my old information — good to hear there was an extension passed. Thanks so much again!!

Just as an FYI. What was confusing me was the Year 2006 max amount. See paragraphs from IRS pub 946 below, which I just copied and pasted off of www.irs.gov:

“Dollar Limits
The total amount you can elect to deduct under section 179 for most property placed in service in 2005 generally cannot be more than $105,000 ($108,000 in 2006). If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $105,000. You do not have to claim the full $105,000.

Reduced dollar limit for cost exceeding $420,000.   If the cost of your qualifying section 179 property placed in service in a year is more than $420,000 ($430,000 in 2006), you generally must reduce the dollar limit (but not below zero) by the amount of cost over $420,000. If the cost of your section 179 property placed in service during 2005 is $525,000 ($535,000 in 2006) or more, you cannot take a section 179 deduction.”

In 2005 the max deduction was $105,000 — with a dollar for dollar reduction in that amount above $420,000.  This means that you run out of deduction at 420+105 = $525,000 (which is the figure in the IRS text).

In 2006, the max deduction is given as $108,000 and the phase out starts at $430,000. From that one would think that the top-end number is 430+108 = $538,000. However, in the IRS pub you see the number is $535,000 ???

Your top-end number for 2007 makes sense (450+112 = $562,000), but is it the REAL number ??

Do you have any insight on the 2006 number and the source for your 2007 number? Perhaps the 2005 number is a typo (smile)?

Thanks so much!!

Regards,

A-2:

That $535,000 figure is either a typo or a reflection of the quality of the basic math skills of IRS employees.

The numbers on my page are accurate and obviously more reliable than those in the IRS publications.

Kerry

Follow-Up:

Hi Kerry!

 

Being a state employee of NC (university professor) I didn’t want to make a comment about government workers (smile) — but I assumed that it was a typo/error of some sort. It only makes sense that once you run out of dollar-for-dollar reduction (i.e. it goes to zero) then you have hit to top-end. But, one never knows what goes through lawmakers, lawyers and accountants minds sometimes (I can say that b/c I have several in my family -smile). Thanks so much for your info and good cheer. It has been my pleasure, and if there is anything that I can ever do for you please do not hesitate to write. Thanks again!

Regards,

 

Q:

Subject: plagarism

Kerry,

Dont know if this concerns you or not but it looks like your site is being plagarized word for word here:

http://www.groco.com/readingroom/sec179_businessequipment.aspx

Anyway I was sending you this email cause I wanted to know if you could provide me a site to prove that section 179 can apply to used items as long as they are “new to you.” Look at the code and regs and cannot seem to find anything. Thanks.

A:

Since I created that page on Section 179 from scratch, with the occasional update for new developments, I am flattered that other tax pros want to use it.  I am aware of others on the web who have made use of my info, but they generally give me credit as the author.  Obviously, not everyone has the same good manners.  This copy that you found was obviously made several months ago because it doesn’t include some of the updates I have made to my page.

In regard to the issue of whether used equipment can be expensed under Section 179, I guess the fact that I have been claiming that on thousands of clients tax returns since Section 179 was born, with zero problems from IRS, isn’t adequate substantiation for you.

Oftentimes in interpreting laws, it isn’t whether every single item allowed is spelled out; but whether or not something is specifically designated as not being allowable.

If you check IRS Publication 946 under the Eligible Property heading, you will not see one mention of any requirement that it be brand new or that the taxpayer be the first owner.

Similarly, under the heading “Excepted Property” nowhere does it include any mention of an  item that is not brand new.

From QuickFinder Online:

   “It must have been acquired by purchase from an unrelated party.”

There is no mention anywhere of any requirement that the asset be brand new.

A similar review of the Section 179 discussion in The TaxBook reveals not a single mention of a requirement that the asset be brand new.

Good luck.  I hope this helps.

Kerry Kerstetter

Q:

Subject: SECTION 179 QUESTION

Hi Kerry,

 

I read your section recently and was wondering if you could answer a question for me? I purchased a milling machine new in 2006 for 72,000. rigging and taxes pushed the expenditure to 78,000. I would like to sell the machine in 2007,probably in march. Under section 179, How much can I depreciate the machine? I will probably sell the machine for 60,000. Things just didn’t quite work out.

 

Hopefully this makes sense, Thanks for your help.

 

Cheers,

A:

How much you can legally claim for Section 179 on your 2006 1040 and how much you should claim may very well be two completely different numbers.  You should work out different scenarios with your personal professional tax advisor as s/he works on your 2006 tax returns. 

Basically, any amount you claim in Section 179 and normal depreciation on the machine in excess of $18,000 will end up being taxable recapture income on your 2007 tax return.  This may not necessarily be a bad thing because it could very easily be the case that you could save more on your 2006 taxes by claiming a lot of Section 179 than the taxes you will have to repay on your 2007 1040, in addition to the time value of the one year difference in tax dates. 

I have no way of knowing if that would be the case because it depends on so many other factors that only your professional tax preparer can know about.  That is the kind of “what-if” analysis you and your professional tax advisor need to do before completing your 2006 1040.

Good luck.

Kerry Kerstetter

Follow-Up:

Hi Kerry,

 

Thank you for the explanation, I appreciate your input very much.

 

Best Wishes,

Q:

Subject: Guru needed

 

Hello,

 

I found your site and have read a good portion of it — and learned quite a bit.  Thank you!

 

I was wondering if you could answer a question regarding 179 vehicle expensing:

 

In 2004 I puchased a new Chevy Suburban (GW > 6,000 lbs) for my business (real estate investing) and depreciated the entire vehicle in that year (~$50k).

 

Since then, the limit has been reduced to $25,000, but (I think) there remains some additional accelaerated depreciation available.

 

My question is:

 

If I trade-in (or sell) my 2004 suv in 2007 for a new (>6,000 lb gw) suv in 2007, what are the tax consequences with respect to cost recovery and depreciation of the new vehicle?

 

I understanding I’ll be trading up, no cash received (substantial cash out), and that it will be a like-kind asset exchange.  I’m hoping there’ll be

more/new depreciation to take (over a short period of time).

 

Thank you,

A:

I have covered this issue in a number of posts over the last few years; but a quick review would be useful for new readers.

While many people don’t see much difference between a vehicle trade-in and a sale, it can make a huge difference tax-wise. 

If you have depreciated (via Section 179 + normal depreciation) the cost basis down to an amount much lower than the vehicle’s current fair market value, a sale will trigger taxable recapture of some or all of the depreciation and Sec. 179.

If you trade the vehicle in for one with a value of equal or higher amount, there will be no taxable recapture.  Per Form 8824, the remaining undepreciated cost basis of the old vehicle, plus any additional amounts paid via cash and debt will become the cost basis of the new vehicle.

In regard to claiming Section 179 on the new vehicle, the rollover cost portion is not eligible; but the newly paid (via cash or debt) amounts are.  Normal deprecation is available for the amount not deducted under Sec. 179.

The opposite would be the case if the vehicle is worth less than the depreciated coat basis.  A sale would enable a deductible loss; while a trade would require the loss to be rolled over and added to the cost basis of the new vehicle.

This is why I always give my clients a copy of their next year’s depreciation schedule along with their tax returns, and advise that they check the asset’s depreciated cost basis (Book Value) before deciding whether to trade a vehicle in or sell it in an independent transaction.

Your personal professional tax advisor should be able to run the numbers for your vehicles and show you the consequences of both options.

Good luck.

Kerry Kerstetter

Q:

Subject: Section 179 – Please help

Hello TaxGuru.  I came across your website after searching google and I think my situation is similar to what you describe in the following link regarding sole proprietorships and taking the Section 179 deduction…

http://www.taxguru.net/2004/07/limits-on-section-179.html

I just wanted to briefly describe my situation and ask you if I am interpreting things correctly.

My wife started a photography business at the beginning of 2006.  For the year, the business will have a net loss of about $16k due to photography equipment purchases.  I wanted to deduct all of these business assets using Section 179.  We are filing married-jointly and we both have W2 income which resulted in positive taxable income both before and after applying the section 179 deductions.  Is this OK to do, or do I need to depreciate the assets?

Thank you for your help!

A:

You seem to be understanding the issue correctly.  Your W-2 income can be used to determine how much Section 179 can be claimed on your wife’s Schedule C.  The net loss, including the Sec. 179, on her C will shelter some of your W-2 income, most likely resulting in a larger refund of taxes withheld from your paychecks.

As I mentioned in that post, as well as in practically every other one, you should work with a professional tax advisor and not try to prepare your own tax returns.  There are so many ways you could screw things up on your own that it would be extremely reckless on your part to do your own 1040.  Practically any tax preparer should be able to save you much more in taxes than his/her fees; so you should end up with more money, in addition to the peace of mind that IRS and your State won’t be coming after you.

Good luck.

Kerry Kerstetter

Q-1:

Subject: Corp. tax deduction

 

Hello Kerry,

 

Is this vehicle rated ok for a one time full purchase price tax deduction for our corporation?

 

Model

TK10906 -2007 YUKON XL DENALI -AWD

 

Gross Vehicle Weight Rating

3360 kg (7409 lb)

 

Purchase price of 2007 Yukon XL is approx. $55,900.00.

 

Thanks for your help,

A-1:

Since the Denali is an SUV, its first year Section 179 deduction is limited to $25,000.  If it were a pickup truck, the maximum would be $108,000.

The rest of the cost over the first $25,000 would be depreciated over five years.

On a related note, I checked on the info that the local Chevy dealer was passing on in their ads.  They weren’t saying that the tax law changed as of 12/31/06. They were only pointing out the obvious fact that calendar year taxpayers had to buy a new vehicle by 12/31/06 in order to claim it on their 2006 tax returns.  Since your corp tax year doesn’t end until later, your deadline is later than those who use December 31 for their tax year.

I hope this helps.

Kerry

Q-2:

Hello Kerry,

 Is a Chevrolet Avalanche Truck ok as a one time full purchase price tax deduction for our corporation?

 Is an open bed truck the only kind of a vehicle that is ok for an one time full purchase price tax deduction?

 Thanks for your help,

A-2:

The rules for which vehicles weighing more than 6,000 pounds are subject to the $25,000 Section 179 limit are on my blog here.

“To not be subject to the limit:
I) is designed to have a seating capacity of more than 9 persons behind the driver’s seat,

`(II) is equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or

`(III) has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.’.”

With the Avalanche, it would need to weight over 6,000 pounds and have an open bed at least 6 feet long.

This sounds similar to a discussion we had last year about a Denali, which I actually posted on my blog.

Good luck.

Kerry

Q:

Subject: Section 179 Expense election

 

I just read your outline on Section 179 Expense Election limits. Without consideration for any phase outs I understood that the limit for 2007 is $112,000 . My 2006 Master Tax Guide stated that the limit would fall back to $25,000 for 2007. Was this updated and changed as part of the 2006 tax bill? Thank you in advance for your reply.

A:

The fast changing nature of tax laws has been the number one reason I have never felt comfortable writing a book.  By the time it reaches the readers, many key provisions are already out of date, as was the case when you bought your copy of the Master Tax Guide.

You would be much better served by using a reference book that publishes periodic updates on the web to notify readers of changes in the printed version.  Both QuickFinders  and The TaxBook  do this.

Good luck.

Kerry Kerstetter

Q-1:

Subject: oh great one

 

Can you tell me who is right on this:

 

Let’s say E and K, husband and wife own personal property that they place into service in their new office for their new business.

 

They draw up a bill of sale for these items to the new business – saying, E and K, as husband and wife, sell these items to New Business for $X.  Then they write a check from New Business checking account to E and K, husband and wife, and E and K cash said check.

 

E is a “member” of the new business.  K is not.

 

Can the personal property qualify as a Section 179 deduction since E and K, husband and wife (apparently for the legal eagles, that is a separate entity even from E or K individually) and K is not a member of the New Business.

 

It’s my understanding that you can’t sell things to yourself and take the Section 179 deduction.  HOWEVER, it appears from the arguments that I’ve heard that it really IS NOT selling it to yourself in this case.  That E and K are a separate entity from the New Business.with E ONLY being  a member of said New Business entity.  (E is an attorney and non attorneys are not allowed to be members of a law firm.)

 

What say you, oh great Guru? 

A-1:

This doesn’t even come close to being in the infamous gray area.  That property would definitely not qualify for Section 179 because it is being acquired from a related party and is not an arm’s length transaction, regardless of the technical ownership of the business.  IRS is very strict with attributed ownership between spouses and your scenario wouldn’t pass muster with them or with any experienced tax pro.

You didn’t say what kind of business entity (sole proprietorship, corp, LLC, etc) would be buying the equipment; but the answer wouldn’t be any different for any kind of entity.

Out of curiosity, is this a real life scenario, a school homework question, or the musings of someone lost in pre new year’s celebrations?

Kerry Kerstetter

Q-2:

Real life scenario.

 

1.  My Dh is an attorney.  Was a partner at a law firm.  Struck out on his own.  Set up 3 offices, a conference room, entry and bathroom.  Many things put into the new office were things we had in another house.  We moved those things from the 2nd house to furnish the new offices.

 

Dh argues that “E and K, husband and wife” are a separate legal entity from Ed Law Firm – and that we should be able to sell things to E Law Firm and E Law Firm should be able to deduct as Section 179.

 

I seemed to recall it saying you couldn’t…..but had pause with this “husband and wife” entity argument.

 

2.  So – what if the furnishings were “owned” by another company owned solely by ME and then the furnishings were sold to E Law Firm?

 

He is not listed with my business and I’m not allowed to be involved in the law firm as ONLY lawyers can be partners or owners of a law firm.

 

I have an incorporation that is currently in place. 

 

I swear, it just doesn’t seem right that just because we already owned this stuff that we can’t get a deduction for it.  We WOULD have to purchase stuff for the office and would get the deduction if we bought it from someone else.  :shrug:

 

Any suggestions?

 

It is set up as a LLC…..we are pondering the S corp option now (albeit late, I know). 

 

Someone said that there are some objections to S corp for lawyers – something about personal services, etc.

A-2:

You really need to be working directly with a professional tax advisor in order to stay out of trouble.

IRS is very strict against allowing inflated deductions based on churning of assets, which is when one supposedly separate entity sells assets to another entity that is related to the one making the “purchase.”  There is too much opportunity for abuse, such as your inflating the sales price above what the items would sell for to unrelated parties.

Every one of your proposed scenarios would be considered illegal churning because of the close relationship between the entities.  Playing with the ownership in your and your husband’s name won’t make it any less a related party transaction.

I have been in this business for over 30 years, and have earned a reputation of being very aggressive and creative in using the tax laws the best advantage.  I wouldn’t dare try what you are proposing because it is very obviously churning. 

What you will be allowed to do is to start claiming normal depreciation deductions based on the realistic fair market values of the assets at the time they are being converted from personal to business use.  Don’t try to depreciate the original purchase prices or you will run into IRS problems.

Again, an experienced tax pro can help you with this, as well as going over the many issues involved in deciding which kind of entity would be appropriate for your unique circumstances.

Good luck.

Kerry Kerstetter

Follow-Up:

I KNOW that a sharp tax advisor could help, but we fear the overzealous who can turn us into a bullseye and hate the idea on the other hand of paying what we don’t have to………:shrug:

 

We live in a 6,000 sq foot house.  2,000 sq ft are the 3 offices, conference room and entry.  The mortgage interest is about $4K per month.  It’s my understanding that an S corp would take away the home office deduction.  It would help with self employment taxes though.  Not sure which way to go. The accountant that I’m working with first suggested S corp, but then I asked her about what deductions I’d be losing and she acted like I was a genius for that occurring to me.  That is NOT the type help I need.  I don’t need any such surprises.