Tax Guru-Ker$tetter Letter
Sunday, February 22, 2004
Section 179 On Converted Assets
As one of the most lucrative tax deductions currently available, the Section 179 election to expense up to $100,000 of new (to you) business equipment continues to generate a lot of inquiries. I received the following email the other day that did allow me an opportunity to point out a key difference between the rules for normal depreciation and Section 179.
I wanted to thank you for this informative site. However, one issue regarding 179 seems unclear from Pub 946 regarding purchased vs. placed in service. For example, say a 6,500 lb truck was purchased for $30,000 in 1996 for personal use. Then, a taxpayer starts a business (sole prop) in March 2003 and has usage as follows: 80% business and 20% personal. Assuming FMV of $10k on March 1(placed in service date), it seems the taxpayer could deduct $8,000 as 179 expense in '03? What is your thought?
Section 179 is only available in the first year the asset is purchased and placed in service. That would have been 1996 for your truck.
Your basis for five year depreciation in 2003 would be the $8,000 figure you mentioned ($10,000 FMV X 80% business use). However, this vehicle is not eligible for a Section 179 expensing.
This is an official IRS regulation - 1.179-4(e) and is not just my opinion.
Sorry to burst your bubble. I don't make the rules. I just make fun of them.
As is often the case, my main reference for this was my handy QuickFinder book; specifically, the following from Page 10-13 of the 2004 1040 Quickfinder Handbook:
Note: The Section 179 election must be made in the first-year property is purchased and placed in service. The election does not apply to property converted from personal to business-use unless the property was also purchased in the same year. [Reg. §1.179-4(e)]
As I illustrate every day, I never shy away from a chance to point out examples of inconsistency and unfairness in the tax rules. In this case, I don't see any. This is very consistent with the long running ban on churning of assets between related parties in attempts to manipulate their depreciation bases. Just as it's never been legal to claim the Section 179 deduction for an asset that you purchased from your own closely held corporation (or vice versa), you can't claim it when you literally buy it from yourself, which is what you are doing when you convert an asset from personal to business use. You can claim normal depreciation based on the lower of its original cost basis to you or its fair market value when converted into business property.