Section 179 Election
Section 179 allows you to elect to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period. However, there are limits on the amount you can deduct in a year.
NOTE: If you intend to make a Section 179 election you must reduce the basis of the asset by the amount expensed under Section 179 before you can calculate depreciation.
You can claim the Section 179 deduction for the cost of qualifying property acquired for use in a trade or business.
You cannot claim the deduction on property you hold only for the production of income, this includes: investment property, rental property (if renting property is not your trade or business), and property that produces royalties.
An estate or trust cannot claim the deduction.
Only the cost of property you acquired by purchase for use in your trade or business qualifies. The cost of property acquired from a related person or group may not qualify.
If you buy an asset with cash and a trade-in, you can claim a section 179 deduction based only on the amount of cash you paid.
The elements of profit motivation, regularity and continuity, of your involvement in the activity and the absence of hobby, amusement, and similar motivations are important factors to consider when determining if an activity qualifies for the Section 179 election. For purposes of the Section 179 election, a husband and wife are considered one entity, this includes a married couple filing separate returns..
The Section 179 expense deduction is allowed only on depreciable , tangible, personal property. Examples of eligible property include trucks, machinery, and computers. Real property, such as buildings and their structural components, does not qualify. Also excluded from the deduction are land and improvements made directly to the land.
If you use property for both business and nonbusiness purposes, you can elect the Section 179 deduction only if you use the property more than 50% for business in the year you place it in service. You figure the part of the cost of the property that is for business use by multiplying the cost of the property by the percentage of business use.
For purposes of the Section 179 deduction, you place property in service in the year it is first made ready and available for a specific use. If you place property in service in a use that does not qualify it for the Section 179 deduction, it cannot later qualify in another year even if you change it to business use.
Limitations on Deduction:
The Section 179 deduction is subject to three limitations:
1. Your annual Section 179 deduction cannot exceed the maximum annual limitation.
*Small Business Jobs Act of 2010 (P.L. 111-240) (September 27, 2010)
**Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) December 17, 2010)
The annual deduction limit applies to all tax entities entitled to use Section 179. Any amount in excess of the annual limit must be carried forward for recovery in future years. You can choose to use all, part or none of the annual deduction. By electing to expense less than the limit you can avoid a Section 179 carryforward. After an asset's basis is reduced by the amount expensed under Section 179, the remaining basis is subject to regular depreciation.
The annual limit applies separately to a partnership and to its individual partners. The annual limit also applies separately to an S corporation and to its shareholders. Because these are conduit entities a portion of the entity's total deduction is allocated to each owner, the owner would then subtract it as an expense on their personal tax return. However, the Section 179 deduction allocated to an owner of a conduit entity plus their own Section 179 deduction from all other sources cannot exceed the annual limit. Any excess must be carried forward.
You can allocate the Section 179 deduction among qualifying assets in any way you want, thus reducing the basis of each of the assets. It is generally to your advantage to take the Section 179 deduction on those assets with the longest life thus recovering your basis sooner, and use regular depreciation methods on those assets with short lives.
2. The amount of your deduction is limited by the annual investment limit.
The maximum code Sec. 179 limitation is reduced dollar for dollar by the cost of qualified property placed in service during the tax year over an investment limitation. For 2010 and 2011, the investment limitation is $2,000,000. However, for 2012, the investment limitation is reduced to $500,000 per year.
For example, if your total cost of Section 179 property for 2010 was $2,100,000, the maximum that you can elect to deduct is $400,000 ($500,000 - ($2,100,000 - $200,0000)). The difference ($100,000) is not carried forward; it is lost. Thus, if you total cost of Section 179 property for the year 2010 is in excess of $2,500,000, no amount may be expensed under Sec. 179.
3. The total cost that you can deduct each year is limited to the taxable income from the active conduct of any trade or business during the year.
Total taxable income is the amount of taxable income computed before deducting the Section 179 expense. Taxable income includes salaries and wages, Section 1231 gains (losses) or income from a sole proprietorship, and any trade or business income allocated to you from a partnership or S corporation in which you actively participated. This means that passive activities do not enter into the calculation. Generally you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.
If the taxable income from the active conduct of a trade or business is less than the allowable Section 179 deduction the amount in excess is carried forward for use in subsequent years. The deductions are carried forward and used on a first-in, first-out basis against the annual limit after current year deductions. To avoid the carryforward you can elect to expense an amount that is equal to the income limitation. This may be desirable if you continuously invest in qualified property and do not expect to use the carryforward the next year.
The basis of an expensed asset for regular depreciation is reduced by the amount expensed under Section 179. This includes the amount that must be carried forward.
Electing the Deduction:
If you want to take the Section 179 deduction you must elect to do so, the deduction is not automatic. You make the election by taking your deduction on Form 4562. Once you elect a Section 179 deduction, you cannot change your selection of 179 property or revoke your election without IRS approval.
For more information on the Section 179 election and other depreciation methods please refer to IRS Publication 946.