Category Archives: Depreciation

Converting nondeductible personal interest into deductible…


Many individuals and families (particularly those with school-age children), use personal loans or credit cards to buy cars or vans, finance private schooling, take vacations, etc.

If you are making significant payments on these kinds of debts, you know you can’t deduct the “personal interest.” That means you are paying the interest portion with after-tax dollars (and perhaps at very high rates as well).

There’s a way to convert your nondeductible interest payments into deductible expense. You can get this tax break if you own your own home.

Specifically, you can take out a home equity loan (in the normal way, from your bank for example) and use the proceeds to pay off your nondeductible debts. You will probably be paying at a lower rate, since many lenders are charging near prime on these loans. And the interest payments will be deductible even though you don’t use the loan for anything connected with the house.

Of course, before you borrow against the equity in your personal residence, you should be certain that you actually get the tax deduction benefit. As always, there are various technical restrictions and limits that may apply, depending on your particular tax facts and circumstances.

First, the loan must be secured by your residence. That is, the lender must have a mortgage interest in it. Don’t confuse so-called “home improvement” loans, which are just one type of personal loan, with qualifying “home equity” loans. The interest on an unsecured home improvement loan isn’t deductible.

Second, the residence securing the debt must either be your principal residence (essentially, the home you live in most of the year) or a single second residence, for example, a vacation home which you use for at least part of the year. If you own more than one “second” residence, a home equity loan secured by only one of them (your choice) can qualify.

Third, although, as noted above, home equity debt doesn’t have to be used on the home, there are limits on the amount of debt than can qualify. Specifically, qualifying home equity debt can’t exceed the lesser of (a) $100,000, or (b) your equity in the home (specifically, the fair market value of the home at the date of the loan reduced by the “acquisition debt,” generally, your first mortgage). For example, say a taxpayer takes out a first mortgage to buy a home worth $300,000. Later, when the first mortgage is still $200,000, but because of a downturn in the real estate market the value of the home has declined to $275,000, the taxpayer takes out a home equity loan to reduce his credit card debts and pay for his daughter’s wedding. The taxpayer will only be able to deduct the interest on a maximum of $75,000 of any home equity loan he takes out ($275,000 fair market value minus $200,000 acquisition debt), even though the lender may be willing to make a loan in excess of the taxpayer’s $75,000 equity in the home. Thus, if the taxpayer took out a $100,000 home equity loan, only 75% of the interest on the loan would be deductible.

Also, you should bear in mind that interest on a home equity loan isn’t deductible for purposes of the alternative minimum tax (AMT), unless you use the loan to improve your home. This is an important consideration, since an increasing number of taxpayers are subject to the AMT.

Note that a home equity lender is required to give you an information return (Form 1098) reporting the interest you paid, but that form doesn’t show the deductible percentage, just the total amount of interest paid.

I would be happy to personally go over all of these rules with you to see if the home equity technique—or other tax-saving strategies that your financial situation may suggest—will work for you.

Please contact us so we can meet.

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Filed under CPA Deerfield Beach, Deductions, Depreciation, Home Equity

Business Tax strategies for Purchasing a New Car

The decision of whether to trade in an old business car or try to sell it for cash generally should be based on factors such as the amount you can get on a sale versus a trade-in, and the time and bother a sale will entail. However, important tax factors also may affect your decision-making process. Here’s an overview of the complex rules that apply to what appears to be a simple transaction, and some pointers on how to achieve the best tax results.

In general, the sale of a business asset yields a gain or loss depending on the net amount you receive from the sale and your basis for it. “Basis” is your cost for tax purposes and, if you bought the asset, usually equals your cost less the depreciation deductions you claimed for the asset over the years. Under the tax-free swap rules, trading in an old business asset for a new, like-kind asset doesn’t result in a current gain or loss, and the new asset’s basis will equal the old asset’s remaining basis plus any cash you paid to trade up. The rules generally are the same for business cars, with a couple of extra twists. Here are some pointers.


As a general rule, you should trade in your old business car if you used it exclusively for business driving, and its basis has been depreciated down to zero, or is very low. The trade-in often avoids a current tax. For  example, if you sell your business car for $9,000, and your basis in it is only $7,000, you will have a $2,000 taxable gain, but if you trade it in, a current tax is avoided. True, your basis in the new car will be lower than it would be if you bought it without a trade-in, but that doesn’t necessarily mean lower depreciation deductions on the new car. Because of the so-called “luxury auto” annual depreciation dollar caps, your annual depreciation deductions on the new car may be the same whether you sold the old car or traded it in.


However, you should consider selling your old business car for cash rather than trading it in if you used it exclusively for business driving and depreciation on the old car was limited by the annual depreciation dollar caps. In this situation, your basis in the old car may exceed its value. If you sell the old car, you will recognize a loss for tax purposes. However, if you trade it in, you will not recognize the loss. By way of a simplified example, let’s assume a business person bought a $30,000 car several years back and used it 100% for business driving. Because of the annual depreciation dollar caps, she still has a $16,000 basis in the car, which has a current value of $14,500. Now, she wants to buy another $30,000 car. If the old car is sold, a $1,500 loss will be recognized ($16,000 basis less $14,500 sale price). If the old car is traded in for a new one, there will be no current loss. Of course, if the old car’s value exceeds its basis, the tax-smart move is to trade it in and thereby avoid a gain.

You also may be better off selling your old business car for cash rather than trading it in, if you used the standard mileage allowance to deduct car-related expenses. For 2011, the allowance is 51¢ per business mile driven from Jan. 1, 2011 through June 30, 2011, and 55.5¢ per business mile driven from July 1, 2011  through Dec. 31, 2011. (For 2012, the allowance is 55.5¢ per business mile driven.) The standard mileage allowance has a built-in allowance for depreciation, which must be reflected in the basis of the car. The deemed depreciation is 22¢ for every business mile traveled during 2011 (23¢ for every business mile traveled in 2012). When it’s time to dispose of a car, the depreciation allowance may leave you with a higher remaining basis than the car’s value. Under these circumstances, the car should be sold in order to recognize the loss.


Did you use your car partially for business, partially for personal use? The rules are more complicated in this situation, which can occur if you are self-employed, or an employee required to supply a car for business use.

  • If you sell the part-business, part-personal-use car, cost and depreciation must be allocated between the business and personal portions. Gain or loss on the business part is recognized; gain, but not loss, is recognized on the personal part.
  • If you trade in the part-business, part-personal-use car, a special basis rule applies for depreciation purposes only: The basis of the new car as computed under the normal trade-in rules is reduced by any difference between (1) the depreciation that would have been allowable had the old car been used 100% for business driving, and (2) the depreciation claimed for its actual business use.

Are you thinking of leasing a business car? The complex rules that apply to purchased business autos are one reason many businesses are leasing vehicles instead of buying them. You simply deduct the business/investment use portion of annual lease costs, and, if the vehicle is a “luxury” model, you add back to income during each lease year an income inclusion amount derived from an IRS table. For auto leases that begin during 2011, the auto is a “luxury” if the auto’s fair market value exceeds $18,500 ($19,000 for certain trucks and vans treated as autos for purposes of the “luxury” auto rules). There are, however, a few special angles you should be aware of:

  • If you pay an additional sum up-front, it should be amortized over the life of the lease.
  • Any refundable deposit required as part of the lease deal can’t be deducted at all.

All of this sounds very complicated, and it is. Before you sell or trade in your business car or lease a new one, please give us a call and we’ll set up a meeting to discuss your options.

CPA Deerfield Beach

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Filed under Deductions, Deerfield Beach CPA, Depreciation

Business website costs

The business use of websites is widespread, but IRS has not yet issued formal guidance on when Internet website costs can be deducted.

Fortunately, established rules that apply to the deductibility of business costs in general, and formal IRS guidance that applies to software costs in particular (the “software guidelines”), provide a taxpayer launching a business website with some guidance as to the proper treatment of the costs. Here is a brief discussion of some relevant principles:


The time for deducting website design costs (i.e., costs of the website’s overall structure, functionality and appearance) depends on whether the costs are costs of “software” within the meaning of the “software guidelines.” Generally, the portions of the website’s design that are produced from sophisticated programming languages (for example, the “C++” language widely used in website design) will qualify as “software.” On the other hand, there is some doubt as to the extent to which the portions of a design produced from HTML (hypertext markup language) will qualify as “software.”


Website design costs that are “software” costs are deductible under “safe-harbor” rules. The deductibility of website design costs that are “software” costs is governed by the following “safe-harbor” rules.

Generally, if the individual or company launching the website “purchases” the design (i.e., acquires the design from a contractor who is at economic risk should the software not perform), the design costs are amortized (ratably deducted) by that individual or company over the three-year period beginning with the month in which the website is placed in service. Also, non-customized computer software placed in service in tax years beginning before 2013 qualifies as “section 179 property,” and is thus eligible for the Code Sec. 179 elective expensing deduction that is generally available only for machinery and equipment. For tax years beginning in 2011, the deduction is limited to $500,000. For tax years beginning in 2012, the deduction is limited to $139,000. The limits are reduced by the cost of other section 179 property for which the election is made. Also, the election is phased out for taxpayers placing more than $2,000,000 of section 179 property into service during a tax year beginning in 2011 (more than $560,000 for a tax year beginning in 2012). Non-customized software acquired and placed in service in calendar year 2011 is, alternatively, eligible for a 100%-of-cost depreciation deduction (100% bonus depreciation) unlimited by any dollar amount. For software placed in service in calendar year 2012, the bonus depreciation deduction is 50% of cost. The bonus depreciation for an item of software is reduced to take into account any portion of the item’s cost for which a Code Sec. 179 election is made, and regular depreciation deductions are reduced to take into account both the bonus depreciation and any Code Sec. 179 election.

If, instead of being purchased, the website design is “developed” (designed in-house by the individual or company launching the website or designed by an independent contractor who is not at risk should the software not perform), the individual or company launching the website can choose among alternative treatments, including, but not limited to, “currently deducting” the costs (deducting the costs in the year that the costs are paid, or accrued, depending on the taxpayer’s overall accounting method) or amortizing the costs under the three-year rule, discussed above, for a “purchased” design.


Website design costs that aren’t costs of “software” are deductible in accordance with useful life. The time for deducting website design costs that are costs of portions of the design that aren’t “software” depends on the expected “useful life” of these non-software portions of the design. Thus, these costs must be amortized over the number of years that it is expected that the non-software portions of the design will be used in the business (except if it is expected that these non-software portions of the design will have a useful life of no more than a year, in which case the costs can be currently deducted.)


Website content that is advertising is generally currently deductible; the treatment of other content costs will vary. Advertising costs are, generally, currently deductible. Thus, the costs of website content that is advertising are, generally, currently deductible. Website content that isn’t advertising will be currently deductible, or amortized over a multi-tax year period, depending on its useful life.

The deductibility of some website costs that are business start-up costs is limited. Where website costs that would otherwise be currently deductible are paid or accrued before a business begins, the costs are deductible only upon the termination or disposition of the business, unless the taxpayer elects to (1) deduct up to $5,000 of the costs in the year that the business starts and/or (2) amortize the costs over a period of 60 months or more beginning with the month that the business starts.

The above principles, and others that effect the deductibility of website costs, suggest ways in which the individual or company launching the website can “take charge” of the treatment of website costs. For instance, an individual or company who contracts for a website design that qualifies as software, and who seeks the favorable tax treatment that applies to the costs of “developed” software, can, if acceptable as a business matter, include, in its written agreement with the developer/contractor, terms that will put the risk that the software won’t perform on the individual or company. Another example of a way to manage the tax treatment of website costs is detailed, descriptive allocations of costs, both in contracts and in internal records.

If you are considering launching a business website, I will be pleased to discuss with you further, and help you implement, the above planning steps or others that will help you manage the tax treatment of your website costs.

Deerfield Beach CPA

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Filed under Amortization, Deductions, Deerfield Beach CPA, Depreciation, Tax Planning