Section 179 or Special Depreciation Allowance for Self Employed Van Purchase

[ClareCA]

Hi there, I have been trying to figure this out myself but having trouble.  I bought a van for $37,000 and am self-employed with a net income of $18,000.  I file jointly with my husband who gets 1099R income.  I am confused about whether Section 179 deduction or Special Depreciation would be better for me.  SD gives me a bigger refund but puts my net income into a negative situation.  Section 179 gives me a much smaller refund but puts my net income at $0.  My income is variable, and so I don't know if I will make the same amount this year as last year, but I can always do a catch-up contribution to a 401k in the future to reduce my taxable income.  I don't think either changes our tax bracket for this year.  I am tempted to go for the higher refund, but maybe it would be more prudent to have a depreciation deduction next year.  Any advice is appreciated.

[MarilynG1]

Be careful when claiming a large deduction for a Business Vehicle in one year.

If you stop using the vehicle for Business, (or sell or trade it in) you will have to pay back a Recapture of Depreciation you took in advance, which is what you are doing when claiming Bonus or 179 Depreciation.  

If you use the van for Business for at least five years, that won't be an issue, however, as it will be considered 'fully depreciated'. 

You could set up the Van as an Asset for your Business, and take regular depreciation over five years (about $7,400 a year), since you don't need the large deduction this year with Business Income of $18,000.

Also, if your Business Income is $0 (or negative) you won't be eligible for the new Qualified Business Income Deduction (QBI) of 20%. 

You can test the different scenarios in TurboTax to see which one works best for you. 

Click here for a detailed article on Managing Business Assets.

[ClareCA]

Thank you, Marilyn.  I'm not too worried about the recapture as I plan to be working and using this van for at least the next five years if not longer.  

[ClareCA]

Can you help me understand the difference between (Partial Section 179 and the special depreciation allowance) and Partial Section 179 by itself?  How would it work if I would take a Partial Section 179 of $10,000 and the special depreciation allowance?  Is the remaining amount after the Partial Section 179 deducted as an expense over the remaining four years or is it depreciated over the remaining four years?  Thank you in advance.

[ColeenD3]

Yes, the amount not chosen for Section 179 is depreciated over the life of the asset. Please see this article for differencdes between the two.

Section 179

Also see IRS article: Sec 179 and Bonus Depreciation