My brother, who has a business that requires use of a vehicle, is thinking about buying a hulking SUV (Hummer/Escalade/Suburban). I seem to recall that there are rapid write off rules for businesses buying vehicles over 6000 lbs.
Question1: What is the rule?
Question2: If he buys it in 2008, can he depreciate just a part of it now then depreciate the remainder (if rule 1 allows it) in 2009 if and when tax rates skyrocket under a different administration?
I sure have to smile at the conditions in the question #2!
Anyway, tax depreciation allows some rather creativity in figuring just what the optimum deductions is for current and future years. For example for a trucker who just bought one of those expensive rigs which cost, say $80,000, there are about 80,001 different possibilities in figuring current year's deduction. Well, maybe not that many, but you'd be surprised.
ChEAr$, Harlan Lunsford, EA n LA
"D.D. Palmer" wrote
Code Section 179. It allows a current expense (accellerated depreciation) on certain fixed assets, among them are certain vehicles.
One of the limitations of Sect 179 is business profits. So that is one minimum hurdle to cross before thinking about Sect 179.
Another limitation is the cost of the item(s) being expensed through Sect
179. Another, spectifically related to the class of vehicle you are referring to, is $25,000.Basically, the first $25,000 of the vehicle cost can be taken as a Sect 179 expense. Any remaining vehicle cost is depreciated over regular rules for 5 years minimum, maybe and often most likely, it's longer than that.
Remember the business profit limitation? If his profits, taking the impact of regular depreciation, is less than $25k, say $20k, then his Section 179 is limited to $20k.
Section 179 expense is taken in the year (and only one year) that the vehicle is purchased and placed in service.
If your brother has a business, he should have an accountant - preferably a CPA or EA - to discuss this with.
One is not required to use section 179, right? Taking depreciation in later years when profits are higher and tax rates are higher makes sense.
wrote
Correct. You are not required to elect Section 179.
But now that the Economic Stimulus Act has reared its ugly act, we find that Sec 168 50% bonus depreciation is once again alive and well, and apparently is the default unless taxpayer takes action to forego it for all property of the same class.
The last time we had bonus dpreciation, I also learned it is a very good idea to formally elect out even when the property does not meet the 168k requirements. Purchase of used equipment for example does not qualify and one might think it unnecesary to elect out of what you cannot use in the first place, but then you start getting IRS nastygrams :^(
Oh, Joy!
===
One additional comment about Sec 179 being limited to business profit: Wages from another job also can be offset by 179 amounts.
Only for proprietorship or partnership of family members.
And FWIW, I too agree to dispense with that bonus depreciation unless you need more than the section 179 in one year. The key is to "plan ahead."
ChEAR$, Harlan
Instructions for Line 11, Form 4562:
"Individuals. Enter the smaller of line 5 or the total taxable income from any trade or business you actively conducted, computed without regard to any section 179 expense deduction, the deduction for one-half of self-employment taxes under section 164(f), or any net operating loss deduction. Also include all wages, salaries, tips, and other compensation you earned as an employee (from Form 1040, line 7). Do not reduce this amount by unreimbursed employee business expenses. If you are married filing a joint return, combine the total taxable incomes for you and your spouse."
-Mark Bole
[...] [...]
But the disallowed deduction ($5K in this example) can be carried over to future years as long as the asset remains in service.
-Mark Bole
And therein lies the rub. Owning a subchapter S corporation is not conducting a trade or business as I found out once upon a time. My husband and wife stockholder clients in an S corporation both had wages. Hers from an unrelated activity, ie her "day" job. His $4,000 in wages came from their equally owned S corporation. Remember that section 179 is first computed at the entity level. Thus when I chose 10,000$ for the section 179, my software wisely and correctly limited the actual section 179 to the $4,000 in his wages. This, then, went on the K1 and passed through to their joint 1040.
See the difference?
ChEAr$, Harlan Lunsford, EA n LA
Yes. ;-)
Continuing on the Form 4562 instructions for Line 11 beyond where I quoted:
"S corporations. Enter the smaller of line 5 or the corporation's total items of income and expense described in section 1366(a) from any trade or business the corporation actively conducted (other than credits, tax-exempt income, the section 179 expense deduction, and the deduction for compensation paid to the corporation's shareholder-employees)."
So, when the S-corp files its Form 4562, the entity-level Sec. 179 business income limitation kicks in, the disallowed amount is presumably carried forward at the entity level. The amount that matches wages paid by the S-corp to shareholders is allowed on the individual return from the Sched. K-1.
I was thinking more about the sole proprietor -- the classic case, someone has a wage job but is also planning to start a business as a sole proprietor. Doing this (actively starting a business) late in the year potentially allows a Sec. 179 deduction against regular wages for taxpayer and spouse.
Sometimes people think the S-corp is a big advantage tax-wise, it's really just a quasi-partnership and it ain't necessarily so.
-Mark Bole
Yes, one must watch his p's and q's for sure. Just today I'm working on an initial estimate for a client starting Sep 15th. His wages from his S corp are so low that he'll only be deducting 22% of his health insurance premiums due to wage limitation, even THOUGH he'll earn another 12,000 from his second job. And since his wife, also a corporate employee is not the owner of the health insurance, nor a shareholder, they can't deduct the rest of health insurance on the 1040. Sure does get invovled at times.
ChEAr$, Harlan Lunsford, EA n LA
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.