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Old 10-14-2008, 10:21 PM
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Sect 179 Property

Howdy to the board,

It's a long story, so I’ll apologize in advance. In 2005, we were essentially "blown out" of Louisiana by Katrina. Not only did this event force us to move away, but it also forced us to examine how we would make a living from that point on. As I grew up in a very rural area of the Deep South, I decided to slow things down a bit and get back to my roots. Way back when, my family made a good part of their living by milling timber and by building heavy timber structures; hence, I decided to revive the skills I was raised with.

Not to state the obvious, but starting a business involving the milling of heavy construction timber requires a large parcel of forested land. Although the rural land in the area we moved to was very reasonably priced, it took us much longer than expected to find a suitable parcel of land. In January of 2007, we began negotiating for a large parcel of forested property [which we eventually purchased]. Unfortunately, our ability to build the structures necessary for our business was in doubt, so we ended up battling with the local town government for permission to build. Many weeks—and a lot of legal costs—later, we got the okay from the local zoning board to build on the property. Things were looking great for us at that point, but before we could actually get anything substantial under way, we received a phone call from our attorney telling us that the abutting land owners were challenging their own zoning board’s decision.

We have now been delayed in building anything on our property for the past 21 months. Despite all of this, we purchased a piece of heavy equipment, lots of tools and other equipment necessary for our business and began building woods roads and clearing the areas we hope to eventually build on, which is continuing to this day.

Having written all of that, I’d like to know what the board’s thoughts are on how I’d like to handle our business. In short, I’ve decided that we will [eventually] win our court case and that our business will actually begin generating income—and this has prompted us to take a look at how we should best file our taxes. Although my business has not made any money, to this point, we certainly have put a lot of time and expense into it. After reading everything I could find on the subject, I’ve decided that we will file a joint 1040 and [hopefully] take advantage of the Section 179 Deduction, while it’s still available. Considering the fact that I’m a married sole proprietor, by definition, I’m assuming that the Business Income Limitation found on Form 4562, Line 11, will include taxable income either one of us make during the tax year. According to Pg 20 of IRS Pub 946, under Married Individuals, joint filers “…are treated as one taxpayer in determining any reduction to the dollar limit….” Furthermore, under the heading of Business Income Limit on Page 21 of the same publication, there is a bulleted statement stating that “Wages, salaries, tips, or other pay earned as an employee” is considered as taxable income relative to the business income limit.

As stated, my business has not been able to generate income as of yet, but my wife is still a full-time employee making a taxable wage. Although I have filed our tax returns for many years without event, I have not had the opportunity to consider the Section 179 deduction in the past. Any thoughts on taking the Section 179 deduction would be greatly appreciated.

Thanks very much for your time,
Red



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Old 10-26-2008, 11:04 AM
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It is difficult to determine what would be the best strategy for your situation as I am not aware of the your tax rate. If your tax rate is at a very low bracket, then electing s179 deduction may not be the best strategy. This would of course lead to lowering of your tax liability, but would not be a wisest course of action, especially if your business becomes more profitable the subsequent year.

Clearly, it would make sense to elect the MACRS method (7 years) of depreciation enabling you to gain some depreciation deduction the subsequent year where profits would be considerably higher causing you to be at a higher tax bracket. The net effect would be to enable you to offset higher taxes in the subsequent year.

But, on the other hand, if you think that your business may not generate sufficient profits for the next few years, then it would be wise to elect the s179 deduction as it would provide you with an immediate tax savings for you.

In any case, I would strongly urge to at least consult your CPA or tax professional who would be more familiar with your specific situation and provide you with the best course of action based on your businesses future cashflows.

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