Eco Car

section 179 - SUV write off?

Someone please correct me if im wrong anywhere in this example:

i earn 60,000 at work per year. My online business earns 0 this year, and 10,000 next year. Therefore 2008 total income = 60k, and 2009 = 70,000.
Half way through 2008, i decide to buy a yukon/tahoe Hybrid for $60,000, but decide to finance, so the payments from june thru december add up to $10,000. However, i can still use the section 179 deduction of 25,000 and the depreciation, therefore, a dedcution of about $32,000? (thats 25 + 7k) (60-25 = 35/5 yrs = 7k). And i am in the 25% tax bracket, thus i would recieve (.25*32k) $8k back?

in june 2009 i decide to sell car, but i only get 45k for it, do i have to show that as an income?
Or scenerio 2, i trade it in for 45, and get another 60k car. Can i use section 179 and depreciaion again on whole value of the car, or just on the 15k differance?

and final question, does all this work, if it was a lease instead?

The scenerio in your first paragraph seems correct.

For every dollar of depreciation you take (including 179), you have to reduce your basis in the car for when you sell it. So if you sell the car for $45K, you have a gain of $17K. ($45K less $28K, which is $60K less $32K) All $17K would be taxed at ordinary income rates, because you have to "recapture" any depreciation you take - since you got to take an ordinary deduction with your depreciation, you have to claim ordinary income for any gain you get as a result of depreciating the asset.

Using scenerio 2, you can opt to do a 1031 exchange (a "like-kind exchange") for the car. This is usually tax advantageous, but gets a little more complicated. The amount of credit you get for the old car doesn't matter. All that matters is the net "boot" you pay for the new car, which is basically the out-of-pocket expense you have to give up in addition to the car. So if give up the car and the dealer takes over a $5,000 loan balance you had in exchange for a new car and $20,000 cash, then your "boot" is $15,000. You must continue depreciating the original car as if you never traded it, and then depreciate the boot as a separate asset, that was purchased in the year of the trade. You cannot take 179 a second time.

As for the lease, this depends on what type of lease it is. If it is an operating lease, then you don't depreciate the car at all. You simply write off your rent payments as an expense. If it's a capital lease, then you would treat the asset as if you purchased it. Generally it's an operating lease if it's a short-term lease and you don't have the option to buy the car at a discount at the end of the lease. It's a capital lease if it's a longer-term lease (most of the useful life of the car) and/or you have the option to buy it at a discount at the end of the lease. Of course, these are very general scenerios, and there are all kinds of weird rules that could change the answer.

I hope this helps. It may be worth sitting down with a CPA to go over which option would be best for you.

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