 Income tax 2022-2023, section 179, deduction part number two. How much you can deduct? Let's do some wealth preservation with some tax preparation. Most of this information can be found at publication 946, How to Depreciate Property Taxure 2022. You can find on the IRS website, irs.gov, irs.gov. Income tax formula. We're focused on line one income. Remember, in the first half of the income tax formula is, in essence, an income statement. However, just an outline, a scaffolding, other forms and schedules flowing into these line items. One of those, the Schedule C, having business income minus business expenses. The net income then flowing into line one income of our income tax formula. First page of the form 1040, noting that the Schedule C would flow into the Schedule One, flowing into page one of form 1040 line number eight. The Schedule C, profit or loss from business income statement format, income minus expenses, we're focused on the expenses side and more particularly related to the depreciation and even more specifically the 179 component of it. Remember, support accounting instruction by clicking the link below, giving you a free membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. When we're talking about property, plants and equipment, even if you're dealing in a cash based system, you'll typically have to deviate from it doing and a cruel thing. Putting the equipment on the books as an asset allocating the cost over the useful life. That would be the normal thought process for depreciation from a bookkeeping standpoint, which makes sense for decision making. Then you might have an accelerated depreciation. Remember for taxes, we would always like to get the stuff, the depreciation, the expense earlier as a general rule. There are exceptions. So if we can have an accelerated method like a double declining method, a makers method usually being a form of double declining, that could be good. And if we can front load and get the deduction upfront in year one, that is usually a beneficial thing as well. And that's what we're talking now, which is basically the 179 deduction and possibly a special deduction. Are those types of items, which don't make sense from a bookkeeping standpoint, but sometimes make sense from a legal standpoint or from a lawmaking standpoint to try to stimulate the economy or do whatever they're trying to do. So electing the 179 deduction just as a recap and the introduction, you can elect to recover all or part of the cost of certain qualifying property up to a limit by deducting it in the year you place the property in service. So we've got this depreciable property. Normally we would have to depreciate it. We would like oftentimes to get the depreciation in year one, and that's where the 179 deduction may come in. So this is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Okay, so how much can you deduct? That's the big question. Your 179 deduction is generally the cost of the qualifying property. However, in other words, basically whatever you paid for the qualifying property that would qualify for the 179, possibly getting the deduction. Now note how big that deduction could be because normally the idea from a bookkeeping standpoint is that these are such a big deviation in terms of when you're buying the equipment and when you're going to consume them to generate revenue. That's why you had to think about a depreciation in the first place. So it's obviously a substantial depreciation for those businesses buying equipment. That's part of the point from a legislative standpoint because they're trying to stimulate the economy by having people invest in larger pieces of equipment and so on. So however, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. So those are our two limits. Obviously, software helps us to apply these in practice, but we want to have a general idea of them so we can discuss these when talking to people, clients and whatnot. So these limits apply to each taxpayer, not to each business. However, seeing married individuals under dollar limits later. Okay, so for a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Remember automobiles often has their own issues because the iris is concerned that people are buying obviously quite expensive automobiles when they don't need them for the business purpose. If you're just driving to a client's house, do you need a $150,000 car? Probably not. They might be skeptical that you might be overdoing it on the luxury side, meaning personal side of it instead of a business use of it. So that's why they might limit the deduction for automobiles. That causes its own issue. So see, do the passenger automobile limit apply in chapter five? So you can check that out and we might talk a little bit about that later. If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. So if you're limited, it's a qualified piece of equipment, you're limited in one way, shape or form to the amount that you can deduct in the first year, not being able to deduct the full amount, then you may still be able to do what you would normally be able to do. Take the amount that you didn't get to deduct and in essence depreciate it like normal, which you would think using oftentimes like a maker's depreciation, for example, depending on the type of property. We'll talk more about maker's method in future presentations. So trade in of other properties. So if you buy qualifying property with cash and a trade in, its cost for purposes of the section 179 deduction includes only the cash you paid. So example, Silver Leaf, a retail bakery, traded in two ovens having a total adjusted basis of $680. For a new oven costing $1,320, they received an $800 trade in allowance for the old ovens and paid $520 in cash for the new oven. So on the date that Silver Leaf traded in the two old ovens for the new oven, the old ovens and the new ovens are classified as real property under the law of the state in which the old and new ovens are located. And as a result, the old and new ovens are real property for purposes of section 1031. So this is getting a little bit tricky because remember we have this issue in terms of certain types of things. Are they part of the building real property in other words kind of like real estate or are they something separate from the structure in which case you might call them. They would be like equipment or something like that other than part of the property. Now it's kind of interesting in terms of when you would want something to be called real property or not because if it's real property you might be able to get this 1031 exchange which often applies to like real estate which is kind of an interesting kind of scenario when you're talking like in this kind of scenario here because often times if it wasn't related to an exchange situation often times you might want to call it not real property but rather something other than real property like equipment or something because then you might be able to depreciate it possibly having accelerated depreciation like a 179 maybe and possibly being able to depreciate it at least over a shorter period of time as opposed to real estate which you usually have to depreciate over a longer period of time. So it's kind of an interesting example they have here the new oven is section is section 179 property only the portion of the new oven's basins paid by cash qualifies for the section 179 deduction therefore silver leaves qualifying costs for the section 179 deduction is 520 so it's kind of a little bit more of an unusual interesting example their dollar limits so the total amount you can elect to deduct under section 179 for most property placed in service in tax years beginning in 2022 generally cannot be more than 1,080,000 so those are dollar limit quite high often times for small businesses but larger businesses can hit that limit quite readily clearly so if you acquire and place in service more than one item of qualifying property during the year you can allocate the section 179 deduction among the items in any way as long as the total deduction is not more than $1,080,000 so this becomes an interesting area as well you might think that's pretty straightforward but if you have multiple pieces of property that might be subject to a 179 deduction and those properties have different or varying useful life for normal depreciation then if you hit the cap of 1,080,000 you might want to think about like which properties you want to apply the 179 to you would think as a general rule you would like to apply the 179 to those properties that have the longest life of depreciation that's applied to them because then the property that goes over the threshold has the shorter lives hopefully which means you'll still under normal depreciation rules get to recap the costs earlier than later as a general rule so that would be if you hit the caps so it gets a little bit more confusing than just saying well we'll just apply the 179 just willy-nilly until we hit the cap and then go over it you want to think about it possibly a little bit more in depth because there could be differences in future depreciation depending on the useful lives of the property so you do not have to claim the full $1,080,000 either so you could claim less than that why would you ever do that if you had a ability to claim the $1,080,000 why would you ever claim some 179 less than that well if you claim the 179 less than that then you would think that the depreciable property would still get a depreciation deduction in the future and you might be in a situation where if you take enough 179 it's going to take you below into a tax bracket that's lower due to our progressive tax system so you might say hey look I'm going to take enough at this higher tax bracket rate and then maybe I would be better off applying the rest to the future possibly because that will help me out in the future when I'm having a higher tax bracket rate possibly as opposed to taking the deduction earlier so the general rule we always want the deduction earlier normally but there are exceptions for example if I have a lower tax rate due to the progressive tax system due to having less income this year or changes in the tax law I expect to happen next year increase in the tax rate then I might want to take the deduction next year if possible maybe so tip the amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property property of SpongeBob in service for only a part of a 12 month tax year caution after you apply the dollar limit to determine a tentative deduction you must apply the business income limit described later so we'll get into that in it's the other limit right to determine your actual section 179 deduction so example in 2022 you bought and placed in service $1,080,000 in machinery and a $25,000 circular saw for your business you elect to deduct $1,055,000 for the machinery and the entire $25,000 for the saw a total of $1,080,000 so you might say so we hit the limit and instead of just saying I'm going to put the full amount on this piece of equipment that costs the same amount as the limit we decided, they decided to fully depreciate the $25,000 saw and then apply the rest here so that means that you would expect the difference between you know the price of this first piece here and that $1,055,000 you would still be able to depreciate in the future you would imagine that they could have applied all the $179,000 to the first piece of equipment and then have the whole $25,000 of the saw to go forward what would be the difference between the two? why does it matter? well they might have depreciation they might have different depreciation lives into the future which could affect how early you get the depreciation normal depreciation rules so this is the maximum amount you can deduct your $25,000 deduction for the saw completely recovers its cost your basis in depreciation is zero the basis for depreciation in your machinery is $25,000 so you figure this by subtracting your $1,055,000 section $179,000 deduction for the machinery from the $1,080,000 cost of the machinery and then you would expect that $25,000 you would be depreciating over you know whatever the normal terms of depreciation would be so situations affecting dollar limit under certain circumstances the general dollar limits on the section $179,000 deduction may be reduced or increased or there may be additional dollar limits the general dollar limit is affected by any of the following situation the cost of your section $179,000 property placed in service exceeds $2,700,000 you placed in service a sport utility or certain other vehicles they always mess things up you are married filing a joint or separate a joint or separate return so costs exceeding $2,700,000 so now you've got a lot that was put you know we're not talking about the dollar limit but you put a fairly hefty amount in costs of the machinery so if the cost of your qualifying section $179,000 property placed in service in a year is more than $2,700,000 you must generally reduce the dollar limit but not below zero by the amount of cost over the $2,700,000 tax software is helpful with this but you can see the general concept here is which would basically be you want to buy the machinery if you can so that you get the $179,000 deduction but you don't want to go crazy about it one because there's a limit and you're not going to get the $179,000 deduction after that limit and two because if you go way over the limit not only do you not get the $179,000 deduction because of the cap but you're going to reduce possibly the amount of $179,000 deduction cap that you would have otherwise have so if the cost of your section $179,000 property placed in service during 2022 is $3,780,000 or more you cannot take a section $179,000 deduction ouch! example in 2022 Jan Ash placed in service machinery machinery no costing $2,750,000 this cost is $50,000 more than the $2,700,000 so Jane must reduce the dollar limit which is $1,080,000 by the $50,000 over that limit that means that the total that she gets for the $179,000 has been reduced to $1,030,000 so sport utility and certain other vehicles here we go with the vehicle thing the iris is always skeptical about those vehicles because people like to buy expensive stuff in terms of their vehicle so you cannot elect to expense more than $27,000 of the cost of any heavy sport utility vehicle an SUV and certain other vehicles placed in service in tax years beginning in 2022 this rule applies to any four wheeled vehicle primarily designed or used to carry passengers over public streets roads or highways that is related that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight $37,000 limit does not apply to any vehicle designed to seat more than 9 passengers behind the driver seat equipped with a cargo area so either open or enclosed by cap of at least 6 feet in interior length that is not readily accessible from the passenger compartment or that has an integral enclosure fully enclosed the driver compartment and load carry device does not have seating reward of the driver's seat and has no body section protruding more than 30 inches ahead of the leading edge of the windshield now all of this stuff with the cars gets kind of messy because you can imagine what is basically happening here they are saying if you have a car that is for personal use then you would think they want to limit it because you might buy a really fancy car that is over and above what you need then they have this law well if the car is over 6,000 pounds then you would think that that would be more like a work utility vehicle or something like that but then what happened is the SUVs for personal use got fancy over 6,000 pounds because there was tax benefit related to those so now the question is well now it's got to be over 6,000 pounds but you have all these other kind of restrictions that you can think the code puts into place to make sure that it's not actually personal use very fancy over 6,000 pound car that you are getting a personal benefit from but it's actually like a work vehicle which was the original thought of the weight limit in the first place so in other words the weight limit in some cases may have actually backfired in trying to do what it's going to do because it could lead manufacturers to make these SUVs heavy so that they can qualify for a tax benefit possibly but you can see the intent of the code here is trying to say in my interpretation that what is actually a work vehicle versus something that looks like it could be more of a personal vehicle type of thing so married individuals so if you are married you figure your section 179 deduction depends on whether you filed jointly or separately so if you file a joint return you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit regardless of which of you purchased the property or placed it in service so this gets kind of interesting because you know from a tax standpoint you would think that if you had two individuals and they got married then you're kind of like one entity so that kind of makes sense on the one hand but when you look at other kind of things with married couples you don't want to disincentivize people being married so for example when you look at the standard deduction limits and the tax tables typically the standard deduction for married is twice as high as it is for single because because you might have two people that are both working that now have the same tax return same with the progressive tax rates but but when you get to these dollar limitations it's kind of like well now you're one legal entity so would it make sense to double the amount of these limitations so they're saying no here generally right so if you file a joint return you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit regardless of which of you purchased the property or placed it in service if you and your spouse file separate returns you are treated as one taxpayer for the dollar limit including the reduction for costs over $2,700,000 you must allocate the dollar limit after any reduction between you equally unless you both elect a different allocation if the percentages elected by each of you do not total 100% 50% will be allocated to each of you that's getting messy example you are married so you and your spouse file separate returns so now we're getting this messy situation separate returns married couple filing separately you bought and placed in service $2,700,000 of equipment farm machinery in 2022 we're leveling up here on the farm equipment your spouse has a separate business and bought and placed in service $300,000 of qualified business equipment your combined dollar limit is $750,000 this is because you and your spouse must figure the limit as if you were one taxpayer you reduced the $1,080,000 limit by the $300,000 excess of your costs or over the $2,700,000 you elect to allocate the $780,000 limit as follows $741,000 that's going to be the $780,000 times 95% to your machinery and $39,000 that's the 5% allocated to your spouse's equipment so if you did not make an election to allocate your costs in this way you and your spouse would have to allocate $390,000 that's the $780,000 times 50% to each so obviously this is a kind of a messy example but you get kind of the idea of it they're filing separately and so they went over the limit which they're applying to as if they're one taxpayer even though they're filing separately obviously you would think that it wouldn't be right to allocate the limit 50-50 you would think because one of the equipment was a lot higher than the other so you're going to try to use a ratio kind of analysis to allocate the benefit to both sides in a way that seems fair okay joint return after filing separate returns if you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return the dollar limit on the joint return is the lesser of the following amounts the dollar limit after reducing for any cost to section 179 property over the $2,700,000 the total cost of 179 property you and your spouse elected to expense on your separate returns example the facts are the same as in the previous example except that you elect to deduct $300,000 of the cost of section 179 property on your separate return and your spouse elected to deduct $20,000 so after the due date of your returns you and your spouse file a joint return the dollar limit for section 179 deduction is $20,000 this is the lesser of the following amounts the $780,000 the dollar limit less the cost of section 179 property over the $2,700,000 $320,000 the total you and your spouse elected to expense on your separate returns