Depreciation - Section 179

So I'm not entirely clear on how this works and hopefully someone can make it simple. My accountant gives me these half assed sort of answers while making me feel like a dumbass at the same time. So don't make me feel like a dumbass if you can help yourself :-)

I'm looking at buying a new machine, $90,000. I'm a small one man shop

From what I see if I take the 179 deduction it appears I would be free of paying any taxes for 2017. Does that seem correct?

But what about depreciating the machine over 4-5 years, wouldn't that be better? If I were to depreciate the machine $20,000 per year?

Looking for a dumbified version of the way it works if anyone has a moment.

thanks!

I am not sure what the current section 179 level is, but lets say it is $100,000.
1st you only want to 179 for the amount of your taxable income. So lets say your taxable income is 50k. You 179 for 50k. Your tax liability becomes 0. You still have 50k to write off over then next 4 years. So you would depreciate at 12,500/yr. until the machine is zeroed out.

Hope that helps.

That does help. I thought that if I 179'd then I can't depreciate the following year.

Prototypical said:

That does help. I thought that if I 179'd then I can't depreciate the following year.

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As long as you do not 179 the entire value, you get to write off whatever the balance on the machine is.

Prototypical said:

That does help. I thought that if I 179'd then I can't depreciate the following year.

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You can't depreciate it the second year if you use it all up the first year.

Just depends on your tax load this year. You do not want to waste any depreciation but at the same time want to lower the current taxes owed.

Ziggy2 said:

You can't depreciate it the second year if you use it all up the first year.

Just depends on your tax load this year. You do not want to waste any depreciation but at the same time want to lower the current taxes owed.

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Hmmm...so it looks like for this year I'll be on the hook for maybe $20,000 in taxes.

If I buy a machine for $100,000, the 179 calculator says I can write of $31,000.

So are you saying if I use that $31,000 write off for 179 that I'm done depreciating the machine?

Prototypical said:

Hmmm...so it looks like for this year I'll be on the hook for maybe $20,000 in taxes.

If I buy a machine for $100,000, the 179 calculator says I can write of $31,000.

So are you saying if I use that $31,000 write off for 179 that I'm done depreciating the machine?

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No, if you section 31k you have 69k to depreciate over 4 or 5 years. I do not remember if the 179 year counts as a year on the depreciation schedule or not.

toolmaker96 said:

No, if you section 31k you have 69k to depreciate over 4 or 5 years. I do not remember if the 179 year counts as a year on the depreciation schedule or not.

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That was the way I understood it by what you said. It looks like Ziggy is saying something else though.

Prototypical said:

That was the way I understood it by what you said. It looks like Ziggy is saying something else though.

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I "think" he is saying the same thing I am when he says "You can't depreciate it the second year if you use it all up the first year" He does not mean if you use all the 179 available, but rather use up the purchase price of the machine.
Ziggy, please correct me if I am misinterpreting what you said above.

toolmaker96 said:

I "think" he is saying the same thing I am when he says "You can't depreciate it the second year if you use it all up the first year" He does not mean if you use all the 179 available, but rather use up the purchase price of the machine.
Ziggy, please correct me if I am misinterpreting what you said above.

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Hmm...yeah, I can read it both ways.

You might need to find a better accountant.

If my accountant couldn't spend the time or have the ability to explain to me, in terms I could understand, I would be looking for a new accountant.

on edit; SND typed faster than me

GM said:

If my accountant couldn't spend the time or have the ability to explain to me, in terms I could understand, I would be looking for a new accountant.

on edit; SND typed faster than me

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I've been thinking about it a lot. I'm having a hard time pulling the trigger though, but eventually I know it will happen. Sometimes his answers are somewhat condescending.

What hasn't been plainly stated is that you can't use a sec.179 to give you a loss; the amount you can claim this year is limited to your profit. Whatever you can't use this year you can depreciate in future years.

Yes, get an accountant that can explain things in easy to understand terms, who is also proactive in suggesting strategies while you still have time to execute them.



Dennis

IMHO you want a better accountant, you need this shit explained in detail so you can get it, because a lot of getting this right is about looking into the future. Yeah eliminating this years tax bill sounds great, but if this new tools going to make you serious coin and then put you into a higher tax bracket in following years you can be one hell of a lot better off taking the longer term depreciation rates rather than just the first year saving. here in the uk above a certain number taxation jumps from 20 to 40%, hence its far better to use any depreciation you can to keep as much income out of the higher bracket, even if that means paying more the first year in tax than you could by taking a bigger write off at the start.

Taxes every were are a convoluted system, you need to understand it and play by the rules, but in one hell of a lot of things when it comes to tax you often have several different options - approaches, getting the best one that suits you can save you a good month or more a year in profit. Its totally legal to do this you just have to know the options open to you and take a good stab at the best approach based on previous and predicted future incomes!

Think of the 179 deduction as a non-recurring expense, except as prev noted- you can't use it to book a loss.

Decide how much of the asset you want to expense the first year, and the remainder goes on a depreciation schedule for whatever class of asset it applies to. So in the case of a machine, you can take say 20% the first year, and put the remaining 80% on a depreciation schedule for 5 or 7 years.

I would take enough to drop down into the lowest tax bracket, and save the rest for depreciation. I'd rather depreciate against a 25% tax liability than a 15% tax liability...

toolmaker96 said:

I "think" he is saying the same thing I am when he says "You can't depreciate it the second year if you use it all up the first year" He does not mean if you use all the 179 available, but rather use up the purchase price of the machine.
Ziggy, please correct me if I am misinterpreting what you said above.

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That is exactly what I meant.

I think two things are being confused in this discussion - depreciation and (179) deductions. They are not same. The differences will likely strain the interests of us trying to get product out the door and orders in….but the OP asked for understanding I think its an important distinction toward that

First thing is, there are really two sets of books a company keeps, financial accounting and tax accounting. Financial accounting focuses on properly representing the business in its financial statements whereas tax accounting is figuring out your corporate tax return. Depreciation is the using up of the asset over time in financial accounting, deductions shelter income on your tax return.

Why are they different? Financial accounting, trying to represent the business, says that the machine bought will show up as an asset on the balance sheet. Gradually over its life that asset value is reduced, and the amount it is reduced by each year is expensed (reduces profit) for that year – that is depreciation. This reflects reality, the machine is used up over say 10 years, so it should be profits over that same period of time that are reduced, as its used up. Financial accounting is regulated through GAAP for you guys, and IFSR for us and the rest of the world (we were GAAP but switched a few years ago to IFSR, they’re not that different at this level). If you understand it, it does a very good job of representing business reality in a few pages of numbers

Tax accounting otoh and the 179 deduction are different. Tax law is 100% driven from fiscal policy. The guv wants to encourage say more capital investment so they let you deduct from income (so you’re not taxed on it) as much as you can as soon as you can. The deduction accelerates the tax savings you get over depreciation. Would you rather shelter 90Mof income next year, or 9M per year for 10 years? Assuming rates were the same, you’re better reducing the tax paid today and putting it to work today.

Why does it matter?

Reality is better represented by showing the asset on the balance sheet, and expensing it a bit each year. That may not matter to a one man show, but it does in a bigger business. If you’re a bit bigger and have a bank and/or shareholders or one day are valuing the business for sale, it matters a lot – in the scenario described above profit being reduced 9M per year for 10 years correctly represents things. If you were able to depreciate it all in one year (you can’t) you’d end up with wild swings in profit that aren’t really there (the wild swings ARE picked in the cash flow statement, so the accounting is not hiding anything, really its saying the profit should be reduced over the time period the asset is used up)

Clear as mud?

Prototypical,

I agree with the above advice about needing a better accountant. Anyone who talks down to a client does not deserve their business.

Finding a good one is the same as finding a good dentist, doctor, or mechanic. I have found a CPA is not that much more expensive than a plain accountant.

If you are on good terms with another machine shop, ask who they use and are they happy with the service. Ask for a recommendation at your bank, or any other same size business as yours.

Paul

Mcgyver said:

Why does it matter?

Reality is better represented by showing the asset on the balance sheet, and expensing it a bit each year. That may not matter to a one man show, but it does in a bigger business. If you’re a bit bigger and have a bank and/or shareholders or one day are valuing the business for sale, it matters a lot – in the scenario described above profit being reduced 9M per year for 10 years correctly represents things. If you were able to depreciate it all in one year (you can’t) you’d end up with wild swings in profit that aren’t really there (the wild swings ARE picked in the cash flow statement, so the accounting is not hiding anything, really its saying the profit should be reduced over the time period the asset is used up)

Clear as mud?

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That's all well and good, IF YOU CAN. But a typical situation for a start-up is after scrimping and paying yourself a pittance, this year you've actually made money, and have say, $70,000 in the bank. WOW! I can go out and buy that machine I really need! Not so fast, that money in the bank is pre-tax dollars. Spend all seventy on the machine and you'll be one sorry SOB when you find out you can only expense $10,000 this year, and you owe $12,000 in taxes on the balance... except you don't have a balance, it's all in the machine sitting on the shop floor. This is where the Sec. 179 deduction can really save your bacon... you still don't have any money in the bank, but you don't have any tax liability, either. Depreciation to offset future income is something best accumulated gradually.

Dennis