Tax Guru – Ker$tetter Letter

I recently received this email from a very perceptive reader:

Great articles

Suggestion:  “their different businesses”  did you their different corporation.  A corporation may have various DBAs or business but only qualifies for 1 section 179 expense election.  Keep up the good work. 

More Deductions

As I have described elsewhere, the Section 179 expensing election is much more lucrative for owners of C corporations because they can literally multiply their total deduction by splitting their purchases of business assets among their different businesses.  With an S corp, the Section 179 deduction is limited to just the one amount.  Likewise, the deduction for net rental losses is magnified by using a C corp because it can use rental losses to offset all operating income.   An S corp’s rental losses are subject to the restrictive passive loss rules.

 My response:

That is an excellent point.  I should have referred to different “business entities” (1040 Sole Proprietorships vs. 1120 Corporations) instead of the less descriptive different “businesses” because a single 1040 or 1120 could each contain several different and distinct businesses and the Section 179 deduction is limited to a total of $102,000 for the entire 1040 and $102,000 for the total 1120, along with similarly controlled 1120s (a related topic I will probably be discussing soon).  I also appreciate your copying & pasting the text from my site.  That made it easier for me to go in and make the correction. 

Thank you very much for your comments and please continue to point out examples that you notice where I may have said something  in a confusing or otherwise less than precise manner.  The last thing the tax game needs is more confusion.

Kerry Kerstetter

Q:

Hello Mr Kerry M. Kerstetter,
 
My name is T***y and and I would like to thank you for the wonderful advice/information you have on your website. I have two questions if you can answer for me:
 
I am an independent contractor with no employees, 34 yrs old, have an LLC, and am thinking of setting a 419 plan- Do you recommend this.  I plan to put 41k in SEP, 3k in IRA, and rest in 419. If this is not a good plan, what other vehicles are there to save more of your income?
 
Second Question) I plan to purchase a vehicle but do not want to purchase 6000lb one. If I purchase a luxury car @ $45k is there a benefit to purchase one this year vs next year. I have heard this is the last year where one can deduct 10k and next year it will be only 3-4k. Does the vehicle have to be new, or can I purchase an old one like 2002/2003 with 18k miles?
 
Thanks

A:

T***y:

I can’t advise you on the various retirement plan options in this format.  You need to work one on one with a professional tax and/or financial advisor for that.

In regard to the issue of buying a new business vehicle, there are some big differences.  The approximately $10,000 of first year bonus depreciation is only available for brand new (not used) vehicles and this will not be available in 2005 because it was not renewed by our rulers in DC. 

The other Section 179 and regular depreciation deductions are the same for used and brand new vehicles, as long as it is new to you.

I’ve discussed other various aspects of this in numerous recent postings.

Good luck.

Kerry Kerstetter

There is a lot of confusion over the reason for the importance of the requirement for a business vehicle to weigh more than 6,000 pounds for maximum tax deductions.  I’ll give another very short history of this.

Back in 1984, our rulers in DC instigated severe limits on the cost of business vehicles that could be depreciated.  It was called the “Luxury Car Rule,” which is still in place today, with slightly higher dollar amounts.  Before that time, vehicles could be depreciated over three years with no dollar limit.  This had to be capped because so many people shot their mouths off about this great tax break and those who weren’t using it became so resentful that they pressured Congress to trim it back. 

This is just one classic example of why, if you are benefiting from a certain tax break, you should be happy about that, but keep it to yourself.  Other people do not like hearing about your tax breaks and will make it their mission to deprive you of it; which is what just recently happened with the $25,000 limit for Section 179 on SUVs.  That was a direct backlash from environmental wackos, SUV haters, along with people who resent the fact that business vehicles are tax deductible, while personal ones are not.

At that time, in 1984, there was debate over how to distinguish between a normal passenger vehicle and a more utilitarian utility vehicle, which were normally trucks and vans.  The line was set at 6,000 pounds GVW.  Any vehicle weighing more than that was not subject to the luxury car limits and could be depreciated fully over five years.  It was also extended in interpretations of how to claim the Section 179 expensing election for business equipment. 

While many people, including a lot of tax practitioners, only discovered this rule a short while ago, when the Section 179 limit was raised from $24,000 to $100,000, it has been around for more than twenty years, and has been a part of my seminars, speeches and articles all of that time.       

Business vehicles weighing less than 6,000 pounds do qualify for a Section 179 deduction, but a much smaller amount than the heavier ones.  There are also much lower annual depreciation limits.  

For 2004, brand new business vehicles of any weight may also qualify for the special bonus depreciation; so it’s not true that lighter vehicles receive no tax breaks.  They just generate much lower tax breaks than do vehicles weighing more than three tons.