Depreciation - 5 yr or 7 yr?

[oceanlovin'ea]

I have a client who has a lawn service business. He is an S corp. He bought a new tractor last year for aroung $13,000.00.

Is this 5 year property or 7 year property? He bought one a couple of years ago and I used 5 year, but depreciation book looks like maybe it should be 7 year. But I doubt the tractor will last 7 years.

Thanks

Linda

[erchess]

TTB SB Edition 5-8

Asset Class 57.0 on the top right hand side of the page. Read it and see what you think. The way I read it he is providing "Personal Services" and you have a case. On the other hand Seven year property is what you fall back on when you can't comfortably fit something elsewhere and I didn't see tractors for lawn mowing in this list. other than Farm Equipment which is of course also 7 year property for assets placed in service before 09 and 5 year property after that.

Also remember that whenever he gets rid of it he can take all the remaining depreciation.

I am brain dead at the moment so I will just ask - is there a reason he is not taking a Section 179 Election To Expense on most or all of the price? My software would still make me choose a class life but the answer would have little or no relevance to the bottom line on this or future returns.

[JohnH]

I often forego most or all of the Sec 179 unless the taxpayer is already deep into a high tax bracket. I see it as the last decision to be made before finalizing the return. No sense taking an immediate tax deduction at 15% and then paying tax at 28% in the next year. Even taking into account the time value of money won't offfset that math.

Given that tax rates are very likely to rise in the coming years, this is becoming even more of a consideration.

I also take into account whether or not the asset is financed. It's often hard to explain to the client why they only get the interest deduction during years 2-5 when they know they's paying interest and principal. By depreciating the asset, you get a closer match between the total payment and the total deduction (principal plus interest) and avoid the "phantom income" problem. Sometimes it becomes tedious constantly repeating "You already got the deduction back in the first year!" for years 5-7 (or longer)

[oceanlovin'ea]

bought a lot of new equipment

He landed a large new account and so he purchased a lot of new equipment during the year. I am expensing most of it. But thought the tractor would be better depreciated.

The other consideration I have in doing his return is that he has 10 children that they have adopted. So his exemption wipes out most of his taxable income. He still has adoption credits if he does end up with taxable income.

So extending the deductions for depreciation might be better for him in the long run as some of the kids might actually be grown before the next 7 years.

Linda

[RitaB]

In that case

He landed a large new account and so he purchased a lot of new equipment during the year. I am expensing most of it. But thought the tractor would be better depreciated.

The other consideration I have in doing his return is that he has 10 children that they have adopted. So his exemption wipes out most of his taxable income. He still has adoption credits if he does end up with taxable income.

So extending the deductions for depreciation might be better for him in the long run as some of the kids might actually be grown before the next 7 years.

Linda

I probably would not use Section 179 for sure, unless it causes him to get EIC or something. The little items you are expensing I would depreciate for the appropriate class life. He is saving 15% (SE), and in future years, he may be saving more than 15%, but most likely not less. Unless the business loses money, which is another problem altogether when you're feeding 10 kids. Again, you might play around with the depreciation if EIC is a factor. 10 kids. God bless him.

[oceanlovin'ea]

No EIC

He makes too much to get EIC. The most he is going to get back is 2850.00 for additional child tax credit.

If he has some taxable income, the CTC wipes it out. But I did play around some. I opted out of bonus depreciation for one thing.

Linda