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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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What is your best advice on when to take advantage of the Section

Resolved Question:

What is your best advice on when to take advantage of the Section 179 deduction on business property versus depreciation? I am trying to finish up 2007 return (oops) and trying to determine how to handle the purchase of a computer and industrial sewing machine for a new business started in 2007. I also attended some training and had tuition and travel expenses prior to starting business, can I treat those as "start up costs" and take the 5,000 deduction. If so, what is an election statement that must be attached to the return?

Why can't I see your reply???

Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.
HelloCustomer

Generally speaking, claiming the section 179 deduction is a great tax advantage for most taxpayers, as depending on your business income for the year, you may be eligible to deduct the entire cost of that equipment all in the first year it was purchased. This will lower your adjusted gross income and could help you qualify for various other deductions which are limited by your AGI.

The maximum deduction you can claim for a section 179 deduction for the 2007 tax year is $125,000, but you cannot claim more than the taxable income you earned from your business or trade. If the cost of your business property exceeds your business income for the year, you may take a section 179 credit up to the amount of your income for the year, and then the balance must be depreciated over the expected life of the property.

As far as the start up costs incurred, you may deduct up to $5,000 in start up costs your first year in business. Your cost of travel and tuition for classes related to your trade would be eligible. Any start up costs that exceed the $5,000 amount must be amortized over a period of 15 years. You do not need to attach an election statement unless you are choosing to entirely amortize your start up costs enitrely.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.
Customer: replied 5 years ago.

Thanks, XXXXX XXXXX need some clarification. New in 2008 is that you dont have to send statement to elect to use 5k for start up costs, but this return is for 2007. Do I need to send attached statement and, if so, what does it need to say?

Expert:  Merlo replied 5 years ago.
Hello againCustomer

Yes, you are correct that those rules changed for the 2008 tax year. I forgot that you were filing for 2007.

The statement that you need to attached needs to contain the following information:

1. An affirmative statement that you intend to deduct all of your start up costs in the year 2007, or that you intend to deduct all of your start up costs up to $5,000 and then amortize any additional remaining costs over the $5,000.

2. A description of the business to which the start up costs were related.

3. A description of each cost incurred, the amount of each cost incurred, and the date that each cost was incurred.

4. A statement of the date you actively began your business.

This statement should be signed and attached to your return.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thanks again and let me know if you have more questions.
Customer: replied 5 years ago.

Thanks so much.

Just one last question. Since I am filing this late, will the IRS allow me to deduct the start up costs, or because of the late filing, will force me to amortize. It seems to me that I did see that mentioned somewhere in my "research". Should I even bother trying, or should I be okay.

 

Again, thanks so much.

Expert:  Merlo replied 5 years ago.
Hello againCustomer

Unfortunately, I cannot answer that question with 100% certainty.

The old regulations did require that this election could only be made when you filed your return on time, or if you filed an amended return within 6 months of the original due date.

Since the new regulations have come out for 2008, there is "talk" that even though the effective date is for start up costs incurred after 9/8/08, the provisions MAY allow for this to be retroactive back to 2004, mainly because this was basically a revision of American Jobs Creation Act of 2004. But I have seen nothing yet where this has actually been formally approved.

That being the case, it is possible that your deduction might be disallowed, at least at this time. What you may want to do is file without taking the full deduction and then wait to see if they do eventually approve this for retroactive status. If they do, at that time you could always file an amended return.

Thanks again.
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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