How much section 179 to take?

[Unregistered]

My wife is a dentist and owns her own practice which is an s-corp. She is considering purchasing a ~$100,000 piece of equipment before the end of the year and then will possibly section 179 a portion of it. The dilema is that our taxable income after regular depreciation for the equipment is going to be approximately $185,000 which is barely in the 33% tax bracket, just a few thousand dollars above the 28% bracket. In following years we should return well into the 33% tax bracket. If we section 179 more than a couple thousand dollars of the equipment we will realize a 28% (rather than 33%) tax savings for the section 179 amount over the ~$2200. If we just take normal MACRS we will shift the depreciation expenses into the future and realize a 33% tax savings each year for it's depreciable life. I guess our options are as follows:

1. Section 179 all of it in 2005 and realize as low as 25% tax savings
2. Section 179 enough to get our taxable income to $182,800 and realize 33% tax savings on a small amount this year but carry the majority of the basis into future years and realize 33% tax savings
3. Section 179 enough to get our taxable income to $119,950 and realize 28% tax savings on the majority of the basis this year
4. Wait until next year to purchase the equipment and revisit this decision

I know from a TVM standpoint it would still probably make sense to section 179 all of it, however, there is something to be said for spreading the tax benefit out over the next seven years. Especially when TVM makes it a pretty close call as it does in this case. Any suggestions here? Also, am I correct that section 179 expenses can in fact bump you into a lower tax bracket and you do not necissarily realize all of the section 179 tax savings at your marginal tax rate? Thanks for any help on this one.

Matt

[BOB W]

179

Looks like you have all the right questions AND answers. No one can help you any futher, it is all up to you..................

[Snaggletooth]

More Info

Matt, it may also make a difference what YOU do, and whether you are self-employed. In particular, if you are eligible for some s. 179 yourself.

You wouldn't be a tax preparer, would you? You seem to know much about tax planning, more than most laymen.

For example, if you file joint, the limit applies to your joint return, and not just to the corporation. Theoretically, S corporations who have many stockholders are not necessarily cognizant of the tax situations of each shareholder, so the $100,000 in s.179 is allocated to each. If the shareholder can use it and wants to, fine. If not, it may be carried forward. All of this is to explain why the $100K is allowed at both levels. We realize from your post that this is not a multiple-shareholder situation.

However, if you have a business yourself, and choose to expense $15K under s.179, then your wife is limited to $85K. If you're on top of this (and you probably are), I mention it only because of the effect of self-employment tax on your OWN business. The difference between 33% and 28% can easily be eclipsed if you are below the SE threshhold, which recovers some 15.3% differential. The s.179 can do more for you than for your wife.

Let me congratulate you for not wanting to bolt for the maximum benefit this year, at the expense of diluting your weaponry for future years which will most likely be at even higher marginal rates. 90% of my customers, when I give them a choice, will squeeze out every drop of current refund they can, and dry up future year deductions as a result. Some of them will choose to take a LOSS on a proprietorship or partnership, this forego ALL of the abovementioned 15.3% self-employment benefit on EVERY DOLLAR of the loss, even when they KNOW there will be an unavoidable profit in future years.

Regards, Ron Jordan

[Unregistered]

Thanks for the replies. Snaggletooth, I did actually work at a CPA office for about three years and was on my way to becoming a CPA but decided in the end that I didn't want to do that as a career. I have been away from doing taxes except our own for about four years now so I am a little rusty. I am not currently self-employed so the SE tax issue is not an issue.

Another thought I had since my first post was that if we sect. 179 enough to get our MAGI down to $150,000 we would both be able to contribute the max to a Roth IRA. We both max out our Simple plans through her office but it would be nice to get a little more put away into a tax advantaged account. If we did this we would need total depreciation including sect. 179 on the new piece of equipment to be a total of ~$80,000. This of course would severely limit the depreciable basis for future years but we would have an additional $8,000 in our retirement accounts. Hmmmm. What do you think?

Thanks again for the help.

Matt

P.S. I hope I am not encroaching on a strictly professional site here. It seems like a great place to get some good information. Nevertheless, if it is more for professionals to consult with each other let me know.

[Snaggletooth]

Matt

Don't be too concerned about "butting in" on a message board ostensibly for tax professionals only. Firstly, you obviously have had training in the area, and secondly, some 99% of our focus is on the subject matter rather than authorship of same. The only time we feel the board is improperly used is on a few occasions when someone whose question is so devoid of expertise that we all know this guy is not a professional.

Your question poses thoughtful reflections on the effects of tax bracketing, and it is obvious you know quite a bit about it already. There are thousands of specifics to consider, and in an attempt to avoid endless specifics, I'll make only one comment.

"Weigh the upsides and downsides of your entire economic situation - not just your taxes."

As tax professionals, we get pre-occupied with the tax consequences, and often do not consider the "rest of the story" with the whole financial picture. We need to remember that taxes are a subset of total economics, and not vice-versa.