Tax Guru – Ker$tetter Letter

Q:

Subject: sec 179

 

I was reading your article and want to be clear with a couple of your answers as I interpret.

If I buy a used motorhome I can still write off $112,000 in 2007 if the motorhome costs at least $112,000?

If I go over $450,000 in gross receipts ,I will not be able to Take this deduction?

 

thank you

A:

This is a perfect example of why the Tax Game is not for do it yourselfers.

You are seriously misinterpreting the concept behind the phase-out for Section 179.  It has nothing to do with a business’s gross income.  It has everything to do with the dollar amount of qualifying property that is acquired during the tax year in order to limit Sec. 179 to smaller businesses. Businesses that acquire more than $450,000 of qualifying equipment during 2007 will have plenty of normal depreciation deductions, so their Sec 179 will be phased out.

Before you do anything as major as buying a $100,000 plus motor home for your business, you need to work with a professional tax advisor to make sure you understand exactly what the tax ramifications will be, as well as whether a particular ownership strategy (personal, corp, LLC, etc) will make more sense for your unique circumstances.

Good luck.

Kerry Kerstetter

 

Q-1:

Subject: S Corp. buisness income limit for section 179

 

Hi-

 

My husband is a sole shareholder of an S corp.  The S corp. is planning to purchase a SUV (< 6,000, < 14,000) to take the $25,000 section 179 deduction for 2006.  His W2 wage from this S corp. is $35,000.  How can he determine the taxable income of the S corp. to figure a business income limit?

 

My understanding of publication 946 is that he can add back his wage of $35,000 from this S corp. to figure a net income of the S corp.  Does this mean the S corp. can go up to net loss of $25,000?

 

Thank you very much in advance!

A-1:

You are correct that the wages paid by the S corp to your husband can be added back to the corp’s net income or loss in determining its income limit for purposes of Section 179 at the S corp level.

Section 179 expenses do not actually show up as a regular expense on the 1120S.  They are passed through to the shareholders separately and directly on their K-1s. 

This is the kind of thing that should be discussed with a professional tax advisor.  S corps are too complicated to try to do the tax work and planning without the assistance of professional tax advisors.  You are taking a very serious risk of screwing things up badly and incurring severe IRS penalties if you try to prepare your own 1120S and 1040.

I hope this helps.  Good luck.

Kerry Kerstetter

Q-2:

Thank you so much again for your prompt response.  I agree with you about the importance of hiring a qualified tax professional.  My husband and I are not happy with our current tax preparer’s qualification and considering hiring a new tax advisor for 2006.  For example, she used 1065 to file 2004 and 2005 returns for my husband’s single member LLC instead of 1040 schedule C.

 

I wonder if we could hire you to file our tax returns.

 

Thank you again for your great help.

A-2:

That is a little scary, for someone to be so unclear on the rules for single member LLCs.  A change is definitely required.

I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you at.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

Follow-Up:

Hello Mr. Kerstetter-

 

We really wanted you to take us as your new client but I do understand your situation.  We live in Las Vegas, so I guess I could talk to the EA in Carson City  although we should not hire anyone just because they practice their business in the same state 🙂

 

Thanks for your time and information!

Q:

Subject: Section 179 question

Hello Kerry,

I just came across your website and noted that you respond to questions posed to you via Email.  I too have such a question and hope you have a simple answer:

I was hoping to purchase a printing business for ~$60,000 before the end of 2006 and expense it under Section 179.  It appears, however, that the transaction will not complete prior to mid-January 2007.  Am I correct in understanding that I will not be able to take the Section 179 deduction for 2006?  Any workarounds?

Do appreciate your response.

Best regards and Happy Holidays.

A:

For your individual income taxes, you are correct that anything not purchased and placed into service until 2007 may not be expensed on your 2006 1040. 

You really need to be working directly with a tax professional because there are a lot of very important issues that need to be addressed, such as:

Only certain kinds of business assets may be expensed under Section 179.  Depending on how much of your purchase price is allocated to movable equipment, the full price may not be eligible.  Any costs allocated to such normal parts of a business purchase as real estate, inventory, leaseholds, goodwill and covenants not to compete, are not qualifying property for Section 179.

You should also discuss with a professional tax advisor the feasibility of using a corporation to buy and operate the business.  For example, a C corp could select a fiscal year that would actually allow the Section 179 deduction at an earlier time than waiting for your 2007 1040.

As I said, there are a lot of critical issues to consider; and trying to make such important decisions without the assistance of an experienced tax professional is tantamount to fiscal suicide before you even start your business operations.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

 

I am impressed with your prompt response – to someone out of the blue! 

Thank you – and wish you a super successful 2007.