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Claim Section 179 deductions for idle assets

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in Small Business Tax,Small Business Tax Deduction Strategies

A small business can often recover the entire cost of qualified business assets in just one year, thanks to the generous Section 179 deduction. But there a few key wrinkles to the rules.

Strategy: Observe the strict letter of the law. For instance, you can write off costs under Section 179 only for assets placed in service during the tax year. If an asset has not been placed in service by the end of the tax year, no Section 179 deduction is allowed for that asset until the year it is placed in service.

In other words, you can’t currently claim Section 179 deductions for assets you’ve bought and left in the warehouse to be put into use sometime later. The items haven’t been “placed in service” yet. But you may be able to write off costs for items that are ready for use under the “idle asset rule.”

Recent decision: An S corporation operated a trucking business. After consulting with a CPA, the owner purchased an airplane in 2006, not to move freight, but to transport replacement drivers. Then the corporation sold the airplane in 2007 and bought a bigger one for $135,000.

The S corp claimed the maximum Section 179 deduction of $125,000 for 2007 for the airplane on its 2007 return. It also deducted $10,500 for upkeep and storage of the aircraft.

The first plane was never used for any business activity. Although the owner took flying lessons with both planes, he only held a student license. No company employees or officers held a pilot’s license in 2007 that would have enabled them to transport replacement drivers. The company also lacked any arrangement for standby pilots to fly the planes.

In this instance, the Tax Court determined that the idle asset rule didn’t apply to the aircraft. The planes were not idle because they were used for personal flying lessons. Also, the planes were never prepared for their business use of transporting replacement pilots. (Douglas, TC Memo 2011-214)

Tip: If your business qualifies, the maximum Section 179 deduction for the tax year beginning in 2012 is $138,000 under current law, but there is a good chance that the maximum deduction will eventually be increased to the $500,000 level that applied for 2010 and 2011.

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