Section 179 depreciation recapture question

[James Ringo]

Hello all, I bought a new truck for my business last year and claimed the entire purchase price as section 179 depreciation. I have a separate car for personal use so I'm currently using the truck 100% for the business. 

I am now thinking of selling my personal car. If I do and don't buy a replacement can I avoid recapture? I very seldom drive for personal stuff so I would still use the truck more than 50% for the business, but it would then be less than 100%. If this would trigger recapture how would I calculate it? I am wondering if it might be cheaper to just buy an inexpensive car to drive around for personal tasks rather than pay the recapture, but of course that depends on the numbers. 

[Alton Moore]

Chris--

The answer to this question really depends on the cost of the business truck you now want to use for personal purposes and the cost of the inexpensive car you would buy for personal tasks to avoid 179 recapture.

To back up, you will have Section 179 recapture if the use of the truck is 50%+ used for purposes other than in your trade or business for the current tax year. If you can show that the work truck is still used in your trade or business for 51%+ of the time, then you will not have 179 recapture. However, if you cannot meet that standard, this depreciation recapture will be treated as taxable income for in the year of the recapture, meaning it will be taxed at your top marginal rate.

As an example, if you took Section 179 depreciation on an $25,000 car in the past year, and are now subject to 179 recapture in the current year, you will have approximately $20,000 to $23,500 added to your taxable income for the year. Furthermore, lets say you are have a top marginal rate of 22% (taxable income of $38,701 to $82,500 filing single; $77,401 to $165,000 filing married )--you would then be paying $4,400 to $5,170 in taxes on the recapture.

As you can see from the example, whether purchasing a new, cheap vehicle to be used for personal purposes or resorting to using your work truck for personal purposes really depends on (A) the cost of your work truck and the corresponding Section 179 deduction; (B) your expected top marginal rate for the year; and (C) the cost of the personal vehicle you would but in the case you do not use your work truck for personal purposes. If the cost of the inexpensive car is less than the taxes you expect to pay on the 179 recapture, then (solely from a monetary perspective) it may be better to pursue the inexpensive car for personal purposes route. However, if the same is true (the tax on the 179 recapture is less than the inexpensive car), you may want to consider using your work truck for personal purposes too.