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"Your contribution is deductible." "You can write it all off this year." "The deduction limits don't apply to this model." Well, maybe not. These are all things salesmen say, trying to use tax incentives to push their product. Since deductions and write offs apply to each person's tax situation differently, this means one of two things about salesman using these pitches. Either they're running their mouth about things they don't understand (and shouldn't be trusted), or they know a lot more about their target's finances than they probably should. Most likely, it's the former.
With the recent spending incentives in the tax bill passed in May of 2003, advertisers have been using this angle more than ever. If a tax benefit can tip the scale of a purchase decision to yes, the taxpayer needs to make sure they actually get the benefit. Typically, only the most ideal tax benefit that could result from a purchase is indicated in this sales angel. Many times these deductions can't even apply to a given taxpayer. Sometimes they don't even work at all.
Most often, these deductions only apply if the taxpayer has their own business or uses the property in their employment. One of the biggest abusers of this angle since the May 2003 tax act passed has been in the auto industry. The big pitch has how big SUVs can be written off in full during the year they're purchased, a tax incentive that proved itself so abusive the government closed it in the October 2004 tax act for vehicles purchased after October 10, 2004. The basis for this claim came from two places. First, automobiles with a manufacturer's intended gross weight (vehicle plus a maximum load) over 6,000 lbs. are subject to the automobile deduction limits. Also, until recently, vehicles in this weight category are no longer considered listed property and the section 179 depreciation deduction (which allows some assets, within certain parameters, to be fully depreciated in their year of purchase) could be applied. Second, the recent changes in the section 179 depreciation rules increased the maximum 1st year depreciation deduction from $25,000 to $100,000 for 2003 & 2004, now extended through 2006. While SUVs have since been removed from the enhanced section 179 options (and anyone who tells you otherwise is ill informed or lying), they're still applicable to other business equipment purchases, and the auto industry is far from the only group giving dangerous tax advice to sell products. One of the least responsible groups using this particular tactic occurs in marketing for business start-ups by equipment sellers and franchisers. Few businesses generate a profit in their first year of business. These advertisers know it, but carelessly use such pitches to try and push their products, relying on those same increased section 179 deduction limitations. Specifically, the regulations that don't apply to businesses that operate at a loss.
There are a few things salesmen using these pitches don't tell the buyer. The first one is that a purchaser has to use the equipment at least 50% for business purposes before they can deduct all their expenses without prorating out the business portion, and use as an unreimbursed employee expense doesn't count. The next catch in this issue consists of wether or not the taxpayer can actually take the section 179 deduction. The easy part for most taxpayers is the maximum property limit. Taxpayers are limited to a ceiling of $400K of property placed in service before they begin to lose the ability to take section 179 deductions (otherwise they have to depreciate the property over its useful life, as dictated under section 169). The problematic part of section 179 deductions for most taxpayers is the income limitation. Section 179 deductions can only reduce a taxpayer's business income to 0, not below. The result is that a person may buy equipment for $60K, be entitled to a $60K deduction, but only be able to take $20K of it because their business income is only $20K. Unlike ordinary depreciation deductions, section 179 deduction cannot generate negative income, which can keep sole proprietors from offsetting their other income with a business loss.
Itemized deductions have always been misused as angles for sales pitches. First, a taxpayer has to itemize their deductions to get them. That means they have to come up with $4,800 of itemized deductions, $6,000 if married filing joint, before any benefit comes from the transaction. Once that threshold is met, others still apply. Most itemized deductible purchases count as miscellaneous itemized deductions. As such, they need to exceed 2% of a taxpayer's adjusted gross income before they can even count toward the $4,800/$6,000 threshold. Of course this doesn't stop salesmen from pulling countless people in year after year with pitches that something is deductible when they have no clue what their prey's tax situation is in the first place.
One classic example of this isn't even from a sales pitch for something being sold, but solicitations for donations to not for profit organizations. A tax deduction is no reason in itself to give away money or property, yet it's typically the first persuasive angle donation solicitors use. While for many people these contributions are deductible, for just as many they aren't. Needless to say, most solicitors don't mention that deductibility depends on an individual's specific tax situation. Unfortunately, the people most likely to be persuaded by the siren call of a deduction are usually the people least likely to be eligible to use it. This is simply a matter of experience. Individuals who already itemize their deductions are the people most likely to already be familiar with the rules involved in claiming deductions. Those who don't already itemize their deductions aren't usually as familiar with the rules involved and are more likely to be lured along under the assumption they'll be receiving a deduction.
All said and done, the best advice is not to take tax advice from anyone that wants your money. They're usually not familiar with the actual tax rules involved in the examples they use to pitch their product, and almost never know if they actually apply to you or not. If a tax incentive will make a buy or sell decision, or even be the determining factor in how much, if anything, you chose to donate to a cause, ask your tax advisor. They want your money too, but they're selling tax advice, the very thing you're coming to them for.
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