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Section 179: First, you have to have a business

December 08, 2010

The Section 179 deduction will be a huge part of year-end tax planning for countless business taxpayers this year. The ability to take a current deduction for the purchase of equipment that would otherwise be capitalized and depreciated opens many planning doors. But there are limits, as a Nevada tax preparer learned yesterday in Tax Court.

The preparer had three separate S corporations. He also had a C corporation called Tax Practice Management. He decided he needed an airplane for his far-flung operations in California and Nevada, so his S corpration bought a Cessna in 2004 for $137,500. He took a $102,000 Section 179 deduction on his return for that year.

Along comes the IRS to throw a wrench in things. The Section 179 deduction is only available for property used in a trade or business, and the IRS said that the preparer made too little use of the airplance to take a business deduction. The taxpayer's only business use of the airplane was a test flight to several airports, during which he testified he visited some clients. The only other use of the airplane was some use by third parties who rented it.

TPM has not demonstrated that the airplane was acquired with the [taxpayer's] self-serving testimony, TPM has not presented any evidence that it contemplated using the airplane for purposes of TPM’s management or marketing operations. Further, the airplane leasing agreement specifically provides that TPM entered into the agreement with the intention of generating revenue to offset the airplane’s operating costs. The Court of Appeals for the Ninth Circuit has held that a profit motive does not exist where “activities represented mere attempts to recoup some of * * * [the taxpayers’] costs”. Carter v. Commissioner, 645 F.2d 784, 786 (9th Cir. 1981), affg. T.C. Memo. 198-202. The record lacks evidence providing any clear indication that TPM possessed the requisite profit motive and intent in purchasing the airplane. Because TPM did not acquire the airplane for use in its trade or business, it is unnecessary for us to analyze the other requirements of section 179.

This case reminds us that you can't go out and buy just anything to reduce your taxes through a Section 179 deduction. You need to buy something you need in your business. If you buy equipment for personal use, or that you don't actually need in your business, you might find that the tax results are disappointing when IRS comes for a visit.

Cite: Tax Practice Management, TC Memo 2010-66.

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