Last Minute Section 179 Clarification

After teaching an alpaca tax class I recently sent out a clarification on some Section 179 related issues . . . thought the blog would be a good place to share them as well. Let's face it . . . taxes are basically boring . . . but a necessary evil. So I am really summarizing the issues here . . . if you have any questions please feel free to contact me or your tax professional. The above link goes to IRS Publication 225 (a must for all of us to have on listed under our "favorites") the discussion on Depreciation and Section 179 begins on Page 35.

If you are unincorporated—filing your alpaca business on Schedule F of your Form 1040—you can carry your unused Section 179 deduction forward for an unlimited number of years. This may or may not be a good plan for you. If all of your income is earned—such as wages or self-employment income—you may lose the benefit of your exemptions and itemized deductions. Be sure you review your return prior to filing to be sure you and your tax professional have had a meeting of the minds on the proper treatment of this issue. If the number on the bottom of page one is zero or materially less than the combined amount of your itemized deductions and exemptions you may want to reconsider the treatment given to the assets purchased during the prior tax year to determine if you would have been better served by depreciating them as opposed to writing them off under Section 179.

As an alternative, you might want to consider depreciating your assets in order to create a net operating loss which can be carried back to generate a refund of taxes paid in prior years. Section 179 cannot be carried back—it can only go forward. But a net operating loss generated currently can go back to release previously paid taxes.

If you are anticipating current year alpaca purchases which could provide Section 179 deductions or have Section 179 deductions rolling over from prior years you can use that information to reduce your withholding or estimated tax payments

If you, like many new breeders, filed returns in the past but did not show any alpaca activity even though you were active because you did not have any income to offset your deductions you can amend those returns and take those deductions, elect the Section 179 deduction on the assets purchased in that year and generate a refund.

The above alternatives could provide you with funds to make your monthly alpaca payments or help to pay for your initial herd all due to reduced taxes currently or refunds generated from prior years.

You don’t want to create a partnership, corporation or LLC until you have discussed the various alternatives with your accountant or tax professional. Staying self-employed until you anticipate having some cash inflow generated from your alpaca business will generally allow you the most flexibility in the use of your Section 179 deductions.

Please be assured you don’t need to become tax specialists—you just need the tools to understand your alternatives. Don't forget April 15th lands on a weekend this year so your taxes will be due Monday, April 16th.