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Maximizing EITC

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    #1

    Maximizing EITC

    Paul has a proprietorship (although I don't think the question is entity-specific on the face of it).

    Paul invests $70,000 in 7-yr MACRS equipment. He is contemplating depreciation elections.
    The math works out such that if he can take $49,000 in section 179, and depreciate the remaining
    $21,000 conventionally under MACRS, he will maximize his Earned Income Credit.

    Which of the following is true?

    1) His choices are limited to claiming the entire $70,000 as s.179, or NONE of it as s.179.
    2) He may take $49,000 under s.179 and thereby maximize earned income credit.
    3) Section 179 is not available for taxpayers who maximize earned income credit.
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    #2
    The only duty for the TP

    Is to account for all allowable deductions, see Rev Ruling 56-407 for background regarding taking deductions to accurately computing SE tax.

    There is no requirement, however, to take a 179 deduction, only to report the asset using an accepted depreciation method and the correct business use percentage. The Taxpayer can elect, if he wishes, to take the 179 deduction if the asset qualifies.

    The IRS may question the return but wouldn't have a leg to stand on if the TP were to elect the 179 expense, to whatever amount he saw fit, regardless of the EIC he gained from the transaction. However, on this return I would want to verify the accuracy of the income reported (ensure all income is reported) and make mention of any interest the TP paid for the financing of the equipment purchased, I assume it was financed; (create an overflow worksheet that indicates the description of the asset listed on the 4562 and the amount of interest paid if any.

    Also, instruct the TP to retain the purchase contract receipt, amortization schedule, financing docs, etc in case the return is audited.

    Oh, I like answer 2 by the way!
    Circular 230 Disclosure:

    Don't even think about using the information in this message!

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      #3
      Plus this scenario is one the very best instances of legal "creative taxation." (grin
      ChEAr$,
      Harlan Lunsford, EA n LA

      Comment

        #4
        #2 is correct. It's no different from electing out of bonus depreciation to achieve the same end.
        In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
        Alexis de Tocqueville

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