Quote: (02-11-2015 06:01 PM)Harvey Specter Wrote:
If you take section 179 depreciation on an asset then remove it from the corporation by any means (sale, dividend, compensation, whatever) you need to then recapture the depreciation as ordinary income. So basically there is no benefit for doing it.
It is true that you would have to claim back to depreciation, but you are missing one component... and that is skirting S/E (FICA) taxes.
When you 179 (or deduct) and asset that you will most likely dispose of in a taxable event, you are reducing your income subject to S/E in that year--- When you claim back the income from disposition, you do so on the form 4797, which is not subject to S/E taxes. For example.
Net income = $50,000
179 deduction for SUV used for business = $(25,000)
New net income = $25,000.
That deduction alone, assuming you are in the 25% tax bracket would save you= $10,075 ($25,000 x .403) --- the .403 comes from 25% income tax +15.3 FICA (Medicare + Social Security).
Ok, so it saves you $10,075 the first year, but next year you dispose of that asset and it's time to pay the piper.
For posterity's sakes, let's say you sell it for what you bought it for...$25,000 (this usually never happens by the way but I want to be as conservative as possible in this example).
On your tax return, you would enter in the sale of the asset as $25,000 sales price with a $0 basis because you 179'd the shit out of it the previous year.
This sale would NOT be subject to self employment as it is NOT business income, it is a sale of business property, therefore only subject to your income tax rate of 25%.
So you'd pay $6,250 ($25,000 x .25).
For a total tax savings of... $3,825 (10,075 Section 179 savings - $6,250 tax on disposition).
Chances are the savings are a bit higher as the asset depreciated and was not worth as much as before.But you'd need to consider you took a bath on a double declining asset such as an automobile, but that is a calculation for another day.