S179 versus depreciation versus expenses

[taxdean]

In TurboTax, it asks me if my Schedule C purchase cost $2,500 or less and, if so, seems to indicate I can deduct it as other misc costs,which I assume means with no recapture even if my business ends before its stated life.  Does that seem correct?

On one other item, the cost was above $2,500 and I first chose S179 and then changed it to 100% special  depreciation.  While doing such did change my state tax, it did not change my federal tax by even one dollar (and I am not subject to AMT).  Does this make sense?

Thanks and please reply soon if you can as i am running out of time.  Thanks!

[PatriciaV]

Yes, if you claim the Safe Harbor election to expense assets that would normally be depreciated, there is no depreciation recapture in the future. Instead, you claim a full expense deduction in the year of the purchase.

It's possible that your State depreciation rules are different from the IRS. Your observations imply that one option is allowed by your state and the other is not. You will probably want to choose the one that results in the best outcome for your tax situation.

[Carl]

A SEC179 allows you to fully depreciate the asset in it's first year. That depreciation still has to be recaptured in the future when you sell/dispose of the asset.

The Safe Harbor de Minimis allows you to expense and deduct the cost, if under $2,500 with no recapture in the future. When you elect this option, nothing is added to your cost basis. 

For the Safe Harbor, it can depend on what the asset is. Just because it's less than $2,500 does not mean it qualifies for this. The program has no way of knowing if it qualifies or not. That's why you're queried about it.

[Anonymous_]

With respect to the sale of an asset that was deducted via the de minimis safe harbor see:

Treas. Reg. §1.263(a)-1(f)(3)(iii)

Sale or disposition. Property to which a taxpayer applies the de minimis safe harbor contained in this paragraph (f) is not treated upon sale or other disposition as a capital asset under section 1221 or as property used in the trade or business under section 1231.

[taxdean]

It has always been my experience that California has adjustments to federal depreciation rules so that does not surprise me.  What does surprise me was the question I asked:

On one other item, the cost was above $2,500 and I first chose S179 and then changed it to 100% special depreciation. While doing such did change my state tax, it did not change my federal tax by even one dollar (and I am not subject to AMT). Does this make sense?

Can someone please answer that?

It seems like safe harbor is the best solution unless I expect to be in a higher tax bracket in later years.  Does that sound right?

[taxdean]

Safe Harbor is not a term I used and I am unfamiliar with it.  I am guessing that (1) it provides a full, all in first year, federal deduction that is equivalent to what you get with S179, except that there is no possibility of recapture.  Is that correct?  And (2), that it is available for assets purchased for $2500 or under (de minimis?) but only certain types of assets - I bought two computers, are those eligible?

Thanks!

[Anonymous_]

@taxdean 

The basic concept here is that you are allowed to deduct what you paid for the asset in full and then, at some future date, you simply scrap the item (due to its relatively low cost and value after the asset has been used).

If you sell the asset then, according to the Regulation cited, any gain is ordinary income and your basis is zero.

[taxdean]

That helps.  Can you or anyone answer my other two questions above:

(1) As to whether computers qualify for the de minimis treatment?

(2) for another item that costs slightly more than $2,500, I first chose S179 and then changed it to 100% special depreciation. While doing such did change my state tax (as was not unexpected) , it did not change my federal tax by even one dollar (and I am not subject to AMT). Does this make sense?

Thanks much!

[Carl]

Yes, a computer that costs less than $2,500 (as most do) qualifies for safe harbor.

As for the SEC179/SDA, depending on to many factors to list here (I could write a book) it's perfectly possible it would have no effect on your federal return.For example, if your taxable business income before the SEC179/SDA is already zero, then taking the SEC179/SDA won't change your tax liability for the current tax year being filed. It just gets carried forward to the next year.  Now this is just my opinion, and we all know what those are like. 🙂 But if taking the SEC179 or SDA will not help your tax liability in the current tax year, why take it? Just seems a waste to me. Remember, depreciation, be it "regular" depreciation, SEC179 or SDA, is recaptured and taxed in the tax year you sell the asset. Two things happen in the year of recapture.

1) The recaptured depreciation is included in your AGI for the year of recapture.

2) The increased AGI caused by the depreciation recapture has the potential of being enough to bump you into the next higher tax bracket. (It just depends on the numbers weather is does that, or not.)

I can't speak for the state return, as it's just not possible for me to know the rules of all those states that tax personal income - especially when I don't know the specific state. On top of that, as  FL resident I've never had to deal with state taxes since FL doesn't tax personal income.

[Anonymous_]

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@Carl wrote:

.....be it "regular" depreciation, SEC179 or SDA, is recaptured and taxed in the tax year you sell the asset.

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Section 179 and the safe harbor deminimis election are different concepts:

1) The SDA is not the same thing as the safe harbor deminimis election. The SDA is the special depreciation allowance, which is completely separate and apart.

2) An asset expensed under the safe harbor deminimis election is not "recaptured" in the same manner as a Section 179 asset. The former has an immediate basis of zero and any gain on a sale is taxed as ordinary income (not unrecaptured Section 1250 gain).

[Anonymous_]

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@Carl wrote:

.....if your taxable business income before the SEC179/SDA is already zero, then taking the SEC179/SDA won't change your tax liability for the current tax year being filed. It just gets carried forward to the next year. 

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An asset can be expensed after making a safe harbor deminimis election without regard to taxable income; it does not get carried forward to the next tax year.

[taxdean]

I did not say that neither affected my tax liability.  I said that both seemingly had the exact same effect.  Does that make any sense? 

My business definitely has non-zero income.  Thanks for clarification.

[taxdean]

This sounds great.  Now if someone can just tell me why I can't avail myself of it for 2021 turbo tax desktop, that would help.  I posted another thread asking for a screen shot from a trial run of what the de minimis safe harbor election screen looks like.  Can anyone here do that please?  At least then, I will know it exists on the desktop version.  Thanks.

[taxdean]

Zero income was not the problem anyway, but thanks for the education anyway.

[taxdean]

You said:  "But if taking the SEC179 or SDA will not help your tax liability in the current tax year, why take it? Just seems a waste to me."

I think I said my tax liability was the same with either, which doesn't mean that neither helped.  I was questioning why they both helped by the same amount, which is what I assumed happened.  I suppose i would have to remove the equipment entirely to verify that both did help.  Regardless, it is nice to understand the reason why odd things happen, to help future tax planning, not to mention the slight possibility that Turbo Tax can have a bug.

Thanks for your continued help!