Section 179 Recapture

Forum|Forum|4 years ago
June 30, 2022
6 replies
70 views

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?

Best answer by AmeliesUncle

@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.

pk_

Level 15

@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.

TaxyTaxAuthor

Level 2

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?

Mike9241

Level 15

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.

Mike9241

AmeliesUncleAnswer

Level 15

@Mike9241 wrote:
after that it's sort of a wash between the depreciation recapture on the old vehicle and 179 on the new.

TaxyTaxAuthor

Level 2

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?

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