Forums: Discussions for entrepreneurs and small business.

I think I know the answer to this, but I`m hoping somebody has done this and can confirm it for me.  We started business in 2007.  We made a couple of purchases that we would normally depreciate, but they also qualify for the Sec. 179 deduction so we are going to take that.  However, because we didn`t have a profit last year we need to carry that deduction over to the 2008 tax year.  We`re going to file the correct form with the IRS, but how do I account for those assets on my books?  Do I simply leave the assets on the books and expense them at the end of the 2008 tax year when we take the carried over deduction? 

Thanks!

§179 is an acceptable depreciation method that can be used in the year the asset is purchased only.  Thus if you wish to make this election on an asset purchased in 2007, the election must be made with you 2007 tax return.

§179 expense is a way to obtain an accelerated tax deduction for an item that still has useful value to your business.  Since the item still has useful value and you still own the item, the item should remain on your books and records.  You should maintain another account, in your general ledger, keeping track of the fact that you elected §179 depreciation on the item, just in case you decide to sell, trade-in or otherwise dispose of the asset prior to it`s useful life span.  If this situation were to occur, you would have to recapture or add back into income, the amount of the item that you expensed, yet never used.


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Gina L. Gwozdz, CPA
http://GLGcpa.com
http://TaxTreasures.com

Hi Gina,

Thanks for the info.  I thought that you could only take the deduction up to $108,000 or up to the amount of profit you had for the tax year and if you didn`t have any profit then you could elect to carry the deduction over. 

I need to do some more research.

Thanks again!

First, §179 election can be made up to $125,000 in 2007 (it will be raised to $250,000 in 2008), on investments that do not exceed $500,000.  If you placed more assets in service then the amount is reduced.

The election is made based on the assets placed in service.

The ability to utilize the write-out created by the election is a separate question and is determined based on the entity that made the election and if it is a pass-through entity than it is based on both the entity that made the election and the pass-through entity. 

If the entity that made the election had a loss before ever using one dollar of the §179 election, then I`d advise the owner of that entity to find a new tax accountant, because it would be extremely rare and unusual for it to be worthwhile to take the election.  If the entity that made the election had income then the election can bring the entity`s profit down to zero, but cannot create a loss - the difference would be carried forward to the next year.  I do not have time to go through all the other possible situations at this time.

Depreciation is considered a complex part of the tax code, especially for new businesses.  This is true not only because of the special elections which can be made, such as §179 expense, but also because you need to compute your depreciation for AMT and potentially ACE as well.  If you`d like to start learning more about depreciation please refer to IRS Publication 946, How to Depreciation Property, but please keep in mind that publications are not always updated with the most recent tax law changes in a timely manner; thus you should also look at the last revision date and then search the IRS website for updates since that date.

Best wishes,
Gina


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Gina L. Gwozdz, CPA
http://GLGcpa.com
http://TaxTreasures.com