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This is an easy one - I just want to make sure I don

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This is an easy one...
This is an easy one - I just want to make sure I don't send up any red flares. Two questions:

my wife and I both own heavy SUVs, both purchased five or more years ago and on both we took the Section 179 up-front depreciation. Business use varies from 70 to 95%. We want to trade in our present SUVs in December for new heavy SUVs and take the Section 179 depreciation again, up to $25,000 this time around, for a total of $50,000.

Our IRS bill, without any depreciation write-offs, will be about $37,000 this year, 2010. I am not sure what tax bracket that is and would like an estimate of what the $50,000 write-off would save us in income taxes.

Thank you, XXXXX XXXXX [email protected]
Submitted: 7 years ago.Category: Tax
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10/2/2010
Tax Professional: Gerri A Harrison CFP EA, Enrolled Agent replied 7 years ago
Gerri A Harrison CFP EA
Gerri A Harrison CFP EA, Enrolled Agent
Category: Tax
Satisfied Customers: 252
Experience: 27 years of preparing income tax returns - both personal and small business
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Gerri A Harrison CFP :

Not quite so easy. If you are going trade in the present SUVs for new SUVs then you have to use the like kind exchange option. So you might not be allowed a $50,000 write off.

Gerri A Harrison CFP :

To calculate the tax savings first - need original cost of each SUV, the amount of depreciation taken over and above the Section 179 less the $25,000 taken as Section 179 gives your current cost basis of the SUVs being traded in. The difference between that and the trade-in value determines the gain on the 2 SUVs that you are getting rid of. This gain then must be subtracted from the cost basis of the 2 new SUVs that your are purchasing. If there is enough basis left you could potentially take a Section 179 but depending on the numbers it might not be the full $25k per vehicle. Additionally if the business percentage is not 100% then you cannot take the full $25k, you must prorate it based on business use.

Customer :

Gerri - thank you. Assume SUV A was purchased for 38000 and is now worth 4000. Car B

Customer :

cost 30000 and is now worth 12000. The replacement heavy SUVs will cost

Customer :

30,000 for car A and 25000 for car B. The old cars can be traded in or sold privately.

Customer :

I'll do the arithmetic this week-end and see where I end up. One more question:

Customer :

car B was purchased Dec. 5, 2005. Will its five years be completed on

Customer :

Dec., 2010 or do I have to wait till the year 2011?

Customer :

Ferdinand

Gerri A Harrison CFP :

Car B purchased in 2005 will not be fully depreciated until 6 years since it is a half year the first year and a half year the 6th year.

Customer :

Gerri - thank you. I would like your opinion on a specific example. Fell free to charge me extra if I am out of line.

Customer :

My wife and I expect to owe the IRS 37,000 for 2010. We have paid 26,000 in estimated taxes and expect to pay the difference by January 15, 2011.

Customer :

My wife's old SUV will be traded in before the end of the year for a newer model with the goal of depreciating net 20,000in 2010.

Customer :

My SUV is more complicated. As discussed, it still has six months to go before the five years are complete.So the question is: is it worthwhile to trade it in this year, before the five years are complete, in order to be able to use the extra depreciation to reduce our 2010 tax burden?

Customer :

The car is fine and there is no problem in waiting till mid-2011. It is simply a matter of saving

Customer :

on the tax payments.

Customer :

Thanks for your help!  Ferdinand

Gerri A Harrison CFP EA
Gerri A Harrison CFP EA, Enrolled Agent
Category: Tax
Satisfied Customers: 252
Experience: 27 years of preparing income tax returns - both personal and small business
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Tax Professional: Gerri A Harrison CFP EA, Enrolled Agent replied 7 years ago

Sorry when you indicated you were going to run the numbers I thought you did not need me to the calculations.

 

So - $38000 less the $25000 section 179 less regular depreciation taken (what is that number) equals yours cost. For this example we will say the regular depreciation was $7000 - that would leave you with a cost basis of $6000. This would actually be a loss $2000 which means you would increase your cost in the new one by $2000. That would allow enough for the $25000 section 179 on the cost of the new one.

 

On the second vehicle the $30000 less the $25000 section 179 less regular depreciation (??) might put you at a cost of say $4000. The $4000 and $12000 value leave you with a gain of $8000, This $8000 must then be subtracted from the purchase price of the new to determine your "cost" in the new. So $25000 less the $8000 leaves a deprecation value of $17000 so the section 179 could only be the business percentage of the $17000 and the vehicle would be fully depreciated.

 

So if you can take $25000 on your wife's new vehicle (A) times the business use (lets say 80%) then that would give you the depreciation of the $20000 you are looking for.

 

Hope this helps

 

 

Gerri A Harrison CFP EA
Gerri A Harrison CFP EA, Enrolled Agent
Category: Tax
Satisfied Customers: 252
Experience: 27 years of preparing income tax returns - both personal and small business
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Gerri A Harrison CFP EA and 87 other Tax Specialists are ready to help you
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Customer reply replied 7 years ago
Thanks - just what I wanted. Ferdinand
Customer reply replied 7 years ago
Thanks - just what I wanted. Ferdinand

Tax Professional: Gerri A Harrison CFP EA, Enrolled Agent replied 7 years ago
Glad to help
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Gerri A Harrison CFP EA
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