Section 179 Recapture

[TaxyTax]

Are there any ways to take Section 179 every year for a qualifying vehicle? 

I'd like to buy a new qualifying vehicle every year, but when I sell it in month 13 of ownership, then Recapture would apply. 

Is there any way to avoid that? Let's say the vehicle was purchased to be a rental asset on an app Turo? Does it classify the asset as some other kind of business expense to avoid recapture? 

[pk]

@TaxyTax , if I understand you correctly , the situation you are contemplating is as follows :

(a) at the start of year 1 the business acquires an asset for $40K to be used in production of income. The business on its tax return for the year 1 chooses to take accelerated depreciation under section 179, for the whole  cost of 40K ( and let us assume that this allowed ). Also assume that the business income is sufficient to take this depreciation and still show a profit.

(b) year 2 the business  buys another asset for 40K and again exercises  section 179 for the new/ replacement  asset. all good. so far.  It now sell the earlier asset for 30K ( FMV)   Since the book value of the first asset is ZERO, the disposal  creates a capital gain of  30K and taxed as such. 

(c) Is this going to create a sustainable / profitable situation ?  I don't know  without running a spread sheet with reliable/reasonable figures including data about income stream created by  the asset .   Can you do it -- probably.  Is it going to be worth it  -- I doubt it.    

What you really trying to do is to find out whether  this yearly accelerated ( section 179) gives you a better tax outcome  than taking the  regular depreciation under the same scenario. 

That is my take on this.  May be another poster would have a different  opinion.

pk

[Mike9241]

nothing prevents you from taking 179 or even special depreciation 168(k) on every vehicle. this assumes you have enough business income to use the deduction in the case of 179. there is no income limitation for 168(k) section 1031 - like-kind exchanges no longer applies to anything but real estate.

say the cost of the vehicle  is P

you take depreciation  [this includes 179, regular MACRS, and 168(k)] say D on the vehicle

you now have a tax basis of TB which is the same as P - D

you sell it or trade it in for SP

if SP is less than TB you have an ordinary loss

if SP is more than TB but less than P you have depreciation recapture - ordinary income 

if SP is more than P you have a capital gain on the difference between SP and P and depreciation recapture of D.

there's no way to avoid depreciation recapture except to donate the vehicle to charity.

depreciation recapture never goes away. a $20K vehicle that is fully depreciated and sold after 10 years for $2K results in depreciation recapture  - ordinary income of $2K 

your benefit from the 179 the first year after that it's sort of a wash between the depreciation recapture on the old vehicle and 179 on the new.  

[AmeliesUncle · Accepted solution]

---

@Mike9241 wrote:

after that it's sort of a wash between the depreciation recapture on the old vehicle and 179 on the new.  

---

I disagree.    Section 179 would save both income tax and self-employment tax.  When the vehicle is sold, the §179 recapture rules don't apply, so you only have regular depreciation recapture, which is only subject to income tax (not self-employment tax).  So doing the §179 each year saves self employment tax.

[TaxyTax]

Nicely summarized. Yes, I suppose the question is not just about MARCS vs 179 within the tax year, but also about the applicability to repeat vehicle depreciation year over year to reduce taxable self employed or business income? 

[TaxyTax]

Very comprehensive response! 
Given that P-D is 0 if full price is depreciated in year 1. Then the SP is almost always likely to be lower than P, but greater than 0. Depreciation Recapture is nearly a given.

Assuming SE and business income is there any difference of opinion? Would you be able to use 168K as individual and 179 as business in the same year or two separate vehicles?

[TaxyTax]

Very good point! 
Assuming both self employment tax and W2 related income tax situation. Ordinary income from Recapture  would raise “personal income tax bracket” but  the New 179 would reduce SE tax liability. If done right, there’s a potential that SE tax savings outweigh personal tax liability gained from recapture?

I am new to the platform. How would I get a consultation with you?