What Are Section 179 Deductions?
Section 179 of the Internal Revenue Code allows a sole proprietor, partnership, or corporation to elect to deduct the cost (up to $1,040,000 in 2020) of depreciable tangible personal property acquired for use in a trade or business in the year of purchase. In the absence of the Section 179 deduction, this cost would generally have to be recovered over several years through depreciation deductions.
Caution: The Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act) and the American Jobs Creation Act of 2004 increased the dollar limit for expensing and the phase-out threshold level (see below) under Section 179 for tax years beginning before 2008. The Tax Increase Prevention and Reconciliation Act of 2005 then extended the enhanced thresholds through 2009. The Small Business and Work Opportunity Tax Act of 2007 further increased the amounts and further extended the enhanced thresholds through 2010. The Economic Stimulus Act, the American Recovery and Reinvestment Act of 2009, and the Hiring Incentives to Restore Employment (HIRE) Act of 2010 increased the limit to $250,000 for tax years beginning in 2008, 2009, and 2010. The Small Business Jobs Act of 2010 increased the limit to $500,000 for tax years beginning in 2010 and 2011. The American Taxpayer Relief Act of 2012 extended the $500,000 limit for tax years beginning in 2012 and 2013. The Taxpayer Increase Prevention Act of 2014 extended the $500,000 limit for tax years beginning in 2014. The Protecting Americans from Tax Hikes Act of 2015 permanently extends the $500,000 limit and the $2,000,000 phase-out threshold level and indexes them for inflation after 2015. The Tax Cuts and Jobs Act increased the dollar limit for expensing to $1,000,000 and the phase-out threshold level to $2,500,000 for 2018 and indexes them for inflation after 2018.
Property Eligible and Ineligible for Section 179 Deductions
Only certain types of otherwise depreciable property are eligible for Section 179 election. They are the following:
- Machines, equipment, and furniture (and most other forms of tangible personal property)
- Certain storage facilities
- Certain research facilities
- Off-the-shelf computer software
- Qualified real property (qualified leasehold property and improvements to nonresidential real property including roofs, heating, ventilation and air-conditioning property, fire protection and alarm systems, and security systems)
The following types of property are ineligible for Section 179 election:
- Real property, including buildings and their structural components
- Investment property, including most property leased to others
- Property acquired by gift or inheritance
- Property used by tax-exempt organizations
- Property used by governmental units
- Property used by a passive activity
- Certain property used predominantly outside the United States
- Property acquired from certain related parties
- Property used by foreign persons or entities
Electing Section 179 Treatment
You make Section 179 elections on an item-by-item basis for qualifying property. Generally, you make a Section 179 election in the year the property is first placed in service. The election is made on Form 4562, which is filed with your federal income tax return for the year the property was placed in service. For tax years after 2002, you can revoke the election by amending your federal income tax return, without IRS consent.
Caution: Under prior law, the election to expense under Section 179 could not be revoked without IRS consent. For taxable years after 2002, permission is not required, although once made the revocation is irrevocable.
The election to expense may be applied against the entire cost or a portion of the cost of one or more items. Generally, it is most advantageous to expense property with the longest recovery period. This allows you to recover the total cost of all property in the shortest amount of time.
General Statutory Dollar Limits for Expensing Under Section 179
Under Section 179, the statutory maximum amount you may expense is $1,040,000 (in 2020, $1,020,000 in 2019).
Tip: Special Section 179 rules may apply to businesses located in a federal empowerment zone (this classification is given to designated communities facing high levels of poverty, unemployment, and economic distress). Consult a tax advisor.
Limitations on Section 179 Deductions
If the cost of your Section 179 property placed in service in a year exceeds $2,590,000 (in 2020, $2,550,000 in 2019), your maximum Section 179 deduction is reduced by one dollar for each dollar of cost over the limit. For example, if your total investment in Section 179 property is $3,630,000 or more in tax year 2020, you won't be allowed a Section 179 deduction for that tax year.
Caution: The Economic Stimulus Act of 2008, the American Recovery and Reinvestment Act of 2009, and the Hiring Incentives to Restore Employment (HIRE) Act of 2010 increased the investment limit to $800,000 for tax years beginning in 2008 through 2010. The Small Business Jobs Act of 2010 increased the investment limit to $2,000,000 for tax years beginning in 2010 and 2011. The American Taxpayer Relief Act of 2012 extended the $2,000,000 investment limit for tax years beginning in 2012 and 2013. The Taxpayer Increase Prevention Act of 2014 extended the $2,000,000 investment limit for tax years beginning in 2014. The Protecting Americans from Tax Hikes Act of 2015 permanently extends the $500,000 limit and the $2,000,000 phase-out threshold level and indexes them for inflation after 2015. The Tax Cuts and Jobs Act increased the dollar limit for expensing to $1,000,000 and the phase-out threshold level to $2,500,000 for 2018 and indexes them for inflation after 2018.
Husband and Wife Are Treated As One Taxpayer
You and your spouse are treated as a single taxpayer with respect to the maximum deduction and investment limit. It makes no difference whether you file joint or separate returns.
Example(s): John and Jane are married taxpayers who own separate businesses. In 2020, John buys qualifying property for $1,690,000 for use in his business. Jane purchases qualifying property for $1,000,000 for use in her business.
John's cost + Jane's cost =
Cost subject to limitation
$1,690,000 + $1,000,000 =
Maximum investment limit =
Reduction of $1,000,000 maximum for 2020 =
Example(s): On a joint return, the maximum Section 179 deduction allowed is $940,000 ($1,040,000 - $100,000). If John and Jane file separate returns, they can allocate the $940,000 maximum deduction however they wish, as long as the combined percentages add up to 100 percent. If the combined percentages don't add up to 100 percent, the IRS will automatically allocate 50 percent to each spouse.
Requirement of Business Use
Qualifying property must be used more than 50 percent for business in the year placed in service to be eligible for the Section 179 deduction.
Figuring the Cost of Section 179 Property
The cost of property, for the purposes of the Section 179 deduction, doesn't include that part of the property's basis that is determined by reference to the basis of other property held at any time by the person acquiring the property.
Example(s): Bob Mack purchases a new truck to use in his business. The truck's cost, for purposes of the Section 179 deduction, doesn't include the adjusted basis of the older truck he trades in as part of the same transaction.
Taxable Income Limitation
The Section 179 deduction for each year is limited to the aggregate taxable income derived from the active conduct of any trade or business during the year. This taxable income is computed without regard to any Section 179 deductions, net operating loss carrybacks or carryforwards, or the deduction for self-employment taxes.
Limits on Passenger Vehicles
The depreciation limits that apply to passenger automobiles, electric vehicles, and trucks and vans limit the deduction allowable under Section 179 as well. Certain SUVs with a loaded gross vehicle weight of more than 6,000 pounds, while exempt from the passenger automobile depreciation limits, are subject to a $25,900 (in 2020, $25,500 in 2019) Section 179 deduction limit if put into service on or after October 23, 2004.
Tip: The $25,900 Section 179 deduction limit does not apply to trucks and vans that are exempt from the passenger vehicle depreciation limits.
See IRS Publication 946 for more information.
Partnerships and S Corporations
The maximum annual deduction, the investment limitation, and the taxable income limitation are applied separately at the partnership and partner levels. In 2020, a partnership may elect to deduct up to $1,040,000 of the cost of qualifying property (assuming the taxable income and investment limitations don't reduce the ceiling), and the partner may not claim an expense deduction in excess of $1,040,000, taking into account his or her allocated share of the amount deducted by the partnership (as well as any other Section 179 expenses incurred directly by, or allocated to, him or her).
A similar rule applies to S corporations and S shareholders. A partner's or shareholder's basis in his or her partnership interest is reduced by the amount of Section 179 expense allocated to the partner/shareholder, whether or not the partner/shareholder can currently deduct the Section 179 expenses allocated to him or her.
Section 179 Carryover
The cost of qualifying property that isn't deductible in one tax year under Section 179 (because of the taxable income limit) may be carried over to the next tax year and added to the cost of qualifying property placed in service in that tax year. The maximum deduction for any tax year, however, is still subject to prescribed ceilings as well as investment and taxable income limitations. Amounts carried over must be applied on a first-in, first-out (FIFO) basis. You can't carry over deductions reduced by the investment limit.
Section 179 Recapture Rules
The tax benefit from a Section 179 election must be recaptured if business use of the property falls to 50 percent or less during its regular depreciation recovery period. The recapture amount equals the Section 179 expense deduction taken minus the depreciation on the same amount that would have been allowed under regular depreciation rules. The excess is recaptured as ordinary income, and the basis of the underlying property is increased by the recaptured amount.
Reporting the Recapture
The recapture amount is reported on Form 4797, Part IV. It is reported as income on the federal income tax return of the entity or individual that originally claimed the Section 179 deduction.
Technical Note: If you originally reported the deduction on Schedule C or Schedule F, a portion of the recaptured amount may be subject to self-employment tax.
Special Rules for "Qualified Disaster Assistance" Property
Effective for property placed in service on or after January 1, 2008, the Emergency Economic Stabilization Act of 2008 provides that the maximum IRC Section 179 expense deduction is increased by the lesser of:
- $100,000, or
- The cost of "Qualified Disaster Assistance" property placed in service during the year
The Act also increases the phaseout threshold by the lesser of:
- $600,000, or
- The cost of "Qualified Disaster Assistance" property placed in service during the year
"Qualified Disaster Assistance" property means any property:
- Which is qualified depreciable property (most tangible personal property, most computer software, qualified leasehold property, nonresidential real property, and residential rental property)
- Substantially all of the use of which is in a disaster area with respect to a federally declared disaster occurring before January 1, 2010, and in the active conduct of a trade or business by the taxpayer in such disaster area
- Rehabilitates property damaged, or replaces property destroyed or condemned, as a result of such federally declared disaster, except that, for purposes of this clause, property shall be treated as replacing property destroyed or condemned if, as part of an integrated plan, such property replaces property which is included in a continuous area which includes real property destroyed or condemned,
- is similar in nature to, and located in the same county as, the property being rehabilitated or replaced,
- the original use of which in such disaster area commences with an eligible taxpayer on or after the applicable disaster date,
- which is acquired by such eligible taxpayer by purchase on or after the applicable disaster date, but only if no written binding contract for the acquisition was in effect before such date, and
- which is placed in service by such eligible taxpayer on or before the date which is the last day of the third calendar year following the applicable disaster date (the fourth calendar year in the case of nonresidential real property and residential rental property).
"Qualified Disaster Assistance" property does not include:
- Property eligible for 50 percent bonus depreciation under IRC Section 168(k) (temporary provision established by Economic Stimulus Act of 2008), currently available for 2008 to 2014
- Property eligible for 50 percent bonus depreciation under IRC Section 1400N, applicable to qualifying Gulf Opportunity (GO) Zone property
- Gambling or animal racing property or property used in connection with golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities or stores that, principally, sell alcoholic beverages for off-premises consumption
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