Tax Guru – Ker$tetter Letter

Q:

Hi Tax Guru,

I was researching buying an suv for our business and ran into your column.
My husband and his brother (partnership) opened up a business in the mall (food court) on November 2, 2004 and it is doing fairly well. I was wondering if we should go ahead and buy an suv this year by Dec 31, 2004 to get the 179 deduction or should we wait until January 2005 to purchase our vehicle since we’ve only been in business for 2 months. I know that the deduction for a vehicle changed from up to 100k to 25k but I am not sure what that means since we’ve only been in business a short period of time. I also have a full time job not related to the business. Thanks for your advice.

Sincerely,

A:

As I always advise, it’s never a good idea to spend money just for the tax break, especially on something as expensive as an SUV.  However, since you seem to have already decided on getting one, the other standard advice kicks in.  A deduction on your 2004 tax return (by buying the SUV and placing it into service by 12/31/04) is worth more in the time value of money than the same deduction on your 2005 tax return. 

If your SUV is going to be purchased as a brand new vehicle costing more than $25,000, this decision is even more lopsided this year.  As I’ve already discussed in a number of postings on my blog, the 50% bonus depreciation deduction will expire as of 12/31/04.

The Section 179 deduction is not based on how long the business was in existence.  A business that has been operating two months of the year is entitled to the same $102,000 maximum Section 179 deduction as a business that was active for the full twelve months.

There is a limit on the amount of Section 179 that can be claimed on a tax return based on your taxable income for the year.  However, this calculation isn’t limited to the income generated by the specific business that will be using the new Sec. 179 equipment.  If you have other income, such as from W-2s, the Sec. 179 can be used to offset that.

There could be a difference in the allowable Sec. 179 deduction depending on how the new SUV is purchased.  If the partnership buys it, the taxable income limit will be calculated at the 1065 level, which could mean that nothing is allowed if the partnership already has an operating loss.

If you buy it in your personal name and show it on your 1040, you will be able to use other income, such as W-2s to qualify for a higher Sec. 179 deduction. 

You really should be working directly with a tax pro who can work with your actual figures and circumstances to help you come up with the best game plan.

I hope this helps.  Good luck.

Kerry Kerstetter

 

Q:

Hello Guru!

I am in a bit of a dispute with my CPA regarding the 179 deduction for a huge 6000 pound  Range Rover. 

I am considering making this purchase of this huge vehicle due to a huge tax burden that has fallen at my doorstep due to a very good year.  I have a Sub Chapter S corporation in which I own all stock.  Is it necessary that the automobile be titled in the corporate name or can it be titled to me personally?  I get a much lower interest rate personally than the banks are offering for the corporation.

Any comments would be greatly appreciated.

A:

With an S corp, the actual Section 179 deduction will end up on your 1040 either way.

However, to be technically correct, you need to show the actual asset on the books of the entity which has its name on the vehicle’s title.  If you register it in the corp’s name, you will show it on the 1120S as a corp asset.  The Sec. 179 deduction will flow through via K-1 to Page 2 of Sch. E on your 1040.

If you register it in your personal name, you will show it on your 1040.  This then brings up a big difference on how you can deduct the SUV’s costs if you own it personally.  If you set it up as a rental asset on Schedule C or Page 1 of Schedule E of your 1040, you can claim the business related expenses, including Sec. 179, on that schedule. You would need to show rent income for it which would be by leasing it to your corp.  

If you just show its costs as unreimbursed employee expenses, those will have to be reported under the Miscellaneous Deductions section of your Schedule A.

Bottom-line, claiming it on Sch. A will save you much less in taxes than if you claim it on Schedule C or E because anything that reduces your AGI has much more bang for the buck than personal Sch. A deductions.  It is also a fact that high Sch. A Miscellaneous Deductions will  often trigger the infamous AMT (alternative minimum tax), while those exact same amounts won’t trigger AMT when reported on Sch. C or E.

While these comments should help you decide on the best strategy for your situation, you should also consider the issue of liability.  Many people prefer to title their vehicles in the name of their corps so that any potential lawsuit caused by them would be less likely to jeopardize other personally owned assets.

Good luck.

Kerry Kerstetter