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New Tax Rules for the November 2010 CFP® Certification Examination
New Tax Rules for the November 2010 CFP® Certification Examination
By Debra Sawyer, CPA, CFP®, ChFC®
May 28, 2010
President Obama signed the Hiring Incentives To Restore Employment Act on March 18, 2010 which included one provision that impacts the CFP® Certification Examination. The one change relates to the Section 179 deduction covered in Topic 51 on the CFP Board’s 89 Topic list. Due to the CFP Board of Standards six month cut off for testing new rules, candidates taking the July 2010 exam will not be tested on these new numbers. However, candidates taking the November 2010 CFP® Certification Examination will need to know the following changes to the Section 179 deduction.
Topic 51 – Section 179 Expense
Taxpayers can now claim up to $250,000 of Section 179 expense in 2010 (up from $134,000 for 2010 prior to the new law). Taxpayers will have to reduce the maximum Section 179 expense by one dollar for every dollar of assets placed in service above $800,000 in 2010 (up from $530,000 for 2010 prior to the new law). These increases are retroactive back to January 1, 2010 and will stay in place only for 2010.
Since the Section 179 expense limits have expired and then been retroactively extended numerous times over the last several years, we anticipate that any questions on the CFP® Certification Examination would use numbers well below both the old and new limits so that the answer would be the same regardless of the law change. For example, the client could have only spent $5,000 for the year on new computers. Assuming the client had $5,000 of business income, the client would expense the entire $5,000 this year under Section 179 and not be concerned at all with the $250,000 limit. Keir took a similar approach with several questions in our materials related to Section 179.
We listed below where Section 179 appears in Keir’s July 2010 exam materials in order for students to easily be able to mark up their books with these changes. We highlighted the changes in bold text.
Volume 1 – 2010 Key Facts and Figures (Brown Pages in the front - Study Tips-44)
Section 179 Deduction 2010
Section 179 deduction amount $250,000
Limit on property placed in service $800,000
Volume 2 – Special Elections – Sec. 179 (pages 51.4 – 51.5, 51.7)
First paragraph – page 51.4
MACRS accelerates the depreciation of most assets into the early years of use; however, even greater acceleration is available to small businesses, as provided in Section 179 of the IRC. In 2010, a business acquiring assets other than real estate can expense $250,000 of business-use tangible personal property in the same year as it is placed in service. This amount is reduced by the amount of applicable assets purchased over $800,000 in 2010.
Example – page 51.4
In 2010, a company acquired $950,000 of personal property that was used 100% in the business, so the company may deduct $100,000 immediately [$250,000 – ($950,000 – $800,000)]. Further, a company that acquired $1,200,000 of personal property and used it 100% in the business will have a zero Sec. 179 deduction for the year. [$250,000 – ($1,200,000 – $800,000)].
Second paragraph – page 51.5
For partnerships and S corporations, the Section 179 deduction passes through to the owners. At the individual level, the deduction is limited, regardless of how many businesses the individual owns. For example, Individual A owns 50% of 10 partnerships. Each partnership claims $100,000 in Section 179 deductions and passes through 50% to Individual A. Individual A can only claim a total of $250,000 (in 2010), so some of the expenses that were passed through must be carried forward.
Question 1, Answer D – page 51.7
D. The partnership can claim the Section 179 expense on all three assets.
Note: We deleted “up to $134,000 in 2010” from the end of Answer D.
Keir’s Simulated Exam Answers Key & Rationales (page 27)
Test Session 1, Part 3, Answer 20
20. D is the answer. Section 179 of the Code provides for a deduction of up to $250,000 in 2010 for assets acquired during the year, rather than having to depreciate these assets over their useful lives. Thus, Mr. Schmidt can claim a Section 179 deduction of $16,175 for both the office furniture and the computers. Topic 51
Essential Keys for CFP® Certification Examination Success (pages 148 and 149)
E. Special Elections – Sec. 179 (page 148)
(2) In 2010, a business acquiring assets other than real estate (that are used at least 50% by the business) can expense $250,000 of business-use tangible personal property in the same year as it is placed in service. This amount is reduced by the amount that the applicable assets purchased exceed the $800,000 threshold in 2010.
Example 51-1: Section 179 Deduction (page 149)
In 2010 a company acquired $950,000 of personal property that was used 100% in the business, so the company may deduct $100,000 immediately [$250,000 – ($950,000 - $800,000)].
Further, a company that acquired $1,200,000 of personal property and used it 100% in the business will have a zero Sec. 179 deduction for the year. [$250,000 – ($1,200,000 - $800,000)].
Income Tax Flashcards (Card 108)
• Election to expense assets rather than claim depreciation on these assets
– Up to $250,000 in 2010 can be immediately expensed for personal property used at least 50% in a trade or business
– SUV limit is $25,000
– Limited by the amount of income derived from the trade or business
– Reduced dollar for dollar by the amount of personal property added during the year over $800,000 in 2010
Comprehensive Exam Software – Income Tax (third section)
Two questions
1. Which of the following amounts would be the first-year deduction for five-year property which cost $100,000, using the double-declining method and taking advantage of the 2010 Sec. 179 exclusion? (Topic 51)
A. $20,000 D. $80,000
B. $40,000 E. $100,000
C. $60,000
E is the answer. Sec. 179 provides a deduction in 2010 of up to $250,000 in the year the qualifying property is placed in service. The Section 179 deduction is in addition to the normal first-year depreciation if the cost of the asset exceeds the Section 179 amount. The depreciation must be taken on the property after the Sec. 179 deduction has reduced the original basis.
Original basis $100,000
Sec. 179 deduction 100,000
Adjusted basis for depreciation 0
Double-declining rate, (2 x 20%)
Half-year convention (40% x 1/2) 20%
Normal first-year depreciation (0 x 20%) 0
Total first-year depreciation
($100,000 + 0) $100,000
2. Last week Sarah purchased computers and office furniture which cost $50,000 for her business. Earlier this year, Sarah purchased $75,000 worth of other qualifying property and claimed Section 179 expense. She projects earning $500,000 this year, before any depreciation or Section 179 expense related to the computers and office furniture. What is the maximum amount Sara can claim as Section 179 expense related to the computers and office furniture?
(Topic 51)
A. $0 D. $25,000
B. $10,000 E. $50,000
C. $20,000
E is the answer. The maximum Sec. 179 deduction is reduced dollar-for-dollar by qualifying property placed in service that costs more than $800,000 in 2010 In this case, the Sec. 179 deduction will not be reduced, as she is well under the limit. Therefore, Sara can claim Section 179 expense on the entire $50,000 since she is still beneath the $250,000 limit for Section 179 expense in 2010.