Bad Tax Advice

Have you heard any Black Friday ads from car dealerships? I heard a couple last week. They were bad, really bad. Lying bad. So here’s a reminder—never take tax advice from someone who is trying to sell you a product!

One ad talked about taking advantage of new Section 179 “bonus depreciation” rules. First, Section 179 is not about bonus depreciation. Section 179 allows you to elect to expense certain property (take the entire deduction in one year) instead of capitalizing and depreciating it (taking the deduction over a set number of years). Second, there are new rules for both Section 179 and bonus depreciation but as with so much in the tax code there are pros and cons for whichever method you choose. The new rules increased threshold amounts in certain circumstances (e.g., the luxury auto limitation, and the amounts available for Section 179 and bonus depreciation) and you can now take bonus depreciation for “new to you” property in addition to “brand new” property. But the new rules are not the only rules that apply to the purchase of business property and how it is treated on your business tax return.

Additional rules? Yes. For example, placing property in service late in the year can affect the amount of depreciation you are allowed to take. But more important (and rarely mentioned in these ads) is the simple fact that whether you elect to expense the property under Section 179 or depreciate it when you sell, trade-in, or otherwise dispose of business property “recapture rules” almost always apply. Eventually you have to account for the depreciation or Section 179 expense you took! Depreciation and Section 179 rarely make taxes go away forever—they usually just “kick the can down the road.”

The second ad I heard said to “let the federal government pay” for some of the vehicle. That is not what really happens under any of these rules (new or old). Section 179, and bonus and regular depreciation are not tax credits (dollar for dollar reductions in your tax bill). They are current year deductions that reduce taxable income; they reduce your tax bill by the percentage of tax you normally pay. So if you are a sole proprietor in the new 22% tax bracket, for every dollar reduction in taxable income you save—twenty-two cents. Let me repeat that. If you are a sole proprietor in the 22% tax bracket for every dollar you spend you save about twenty-two cents in income taxes.

Tax Therapy Mantra: Never spend money to save money on taxes!

Spend money to make money. If your business needs furniture, equipment, or supplies by all means, buy it if you can afford it. And deduct it in the most advantageous way possible (this is where a tax professional can really help you). But if you don’t need it, don’t buy it just “for the deduction.” And don’t sell or trade-in business property without consulting with a qualified tax professional first. If you do, expect unintended tax consequences.