What is the Section 179 Deduction
The Section 179 deduction allows the cost of property to be deducted immediately.
Learn about the requirements, the limits, and recapture for the Section 179 Depreciation Election.
The section 179 election allows you to deduct the cost of your depreciable assets immediately. Under section 179 of the Internal Revenue Code, you can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
Section 179 Dollar Limit
The dollar limit on first-year expensing in 2014 was scheduled to be $25,000 but Congress approved legislation extending the $500,000 Section 179 limit. The $500,000 limit is phased out if the cost of the qualifying property placed into service during 2014 exceeds $2,000,000.
The Section 179 deduction had been significantly enhance by the Economic Stimulus Act of 2008. The previous dollar limit was $250,000 in 2010. However, as mentioned above, for 2014, the limit has been extended to $500,000 and the phase-out threshold remains at $2,000,000 for the 2014 tax year.
Note – The 2014 Section 179 dollar limit is $11,060 for cars placed in service during 2013.
Note – Estates and trusts cannot elect the section 179 deduction.
If the total cost of your qualifying section 179 deduction for 2014 is over $2,000,000, you must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. In other words, the $2,000,000 limit is reduced dollar for dollar by the cost of the property that exceeds $2,000,000. If the cost of it is $2,500,000 or more, you cannot take the 179 deduction.
Section 179 example 1: In 2014, you placed in service machinery costing $2,055,000. This cost is $55,000 more than $2,000,000, so you must reduce your dollar limit to $445,000 ($500,000 – $55,000).
Net Losses Disqualify a Full Section 179 Election
You cannot claim the Section 179 deduction if you have an overall net loss for all actively conducted businesses in 2014. If net income is less than the cost of the qualifying property, the Section 179 deduction is limited to the income. The cost over the income limit can be carried forward to 2015. You do not get a carryover unless the deduction is claimed on the return for the first year the property is placed in service. Be sure your accountant completes the expensing section of IRS form 4562 for 2014.
Section 179 Qualifications
The property must be purchased for use in a trade or business (not an investment activity) in 2014. “Purchased” means it was not acquired by gift, inheritance, or converted from personal use. Property that you acquire only for the production of income such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties do not apply.
The property must be tangible personal property, such as computers, furniture, books and so on. Land, buildings, and land improvements are not eligible, as these are real property, not personal property. Land improvements include swimming pools, paved parking areas, wharves, fences, bridges, and docks.
The section 179 election is only for the first year property is “placed in service”. Property placed in service in a use that does not qualify for the section 179 deduction (a non-business use) cannot later qualify in another year, even if its use changes to business.
Section 179 example 2: You purchase a computer in 2013 and use it for personal use but then began to use it for business in 2014. You cannot use the section 179 election deduction. The fact that you changed its use from personal to business use disqualifies the cost of the computer for the deduction. You can claim depreciation for the business use of the computer for 2014 though.
The property must be new to you. Note that the property can be used; it just has to be new to you.
Effect of Standard Depreciation
If the cost basis of the property exceeds the first year section 179 expense limit of $500,000, you compute depreciation on the cost of the property less the amount of the first-year deduction.
Section 179 example 3: In 2014, Justin Zimmerman placed into service a $450,000 machine and $60,000 of furniture. He decided to deduct as a first year expense the full $450,000 for the machine and $50,000 of the furniture, for a total of $500,000, which is the maximum first-year deduction. The $450,000 deduction for the cost of the machine has been fully recovered by Justin. The cost of the furniture is reduced by $50,000, giving Justin a depreciable basis of $10,000 ( $60,000 – $50,000).
Business and Non-Business Use Combination
When you use property for both business and non-business purposes, you can elect the 179 deduction only if you use the property more than 50% for business in the year you place it in service. If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use.
Section 179 example 4: You purchase and placed in service an item of section 179 property costing $15,000. If you use the property 80% for business and 20% for personal purposes, you may deduct $12,000 ($15,000 x 80%) under section 179.
Home Business 179 Deduction
The section 179 deduction is extremely beneficial if you have a home business.
Section 179 example 5: Let’s assume you have a valid home business and purchase a computer, monitor, and printer for $3,000. You also purchase a shredder for $350. You may depreciate the computer equipment over 5 years and the shredder over 7 years, or you may elect to write off the entire $3,350 purchase in the year that you buy the equipment under the Section 179 Election.
To learn more about Home Business Tax Deductions visit our Home Business Section.
Electing the 179 Deduction
You may elect the section 179 deduction by completing Part 1 of Form 4562. An election to take a section 179 deduction for a tax year beginning after 2003 and before 2010, can be revoked by filing an amended return.
The amended return must be filed within the time prescribed by law for the applicable tax year. The amended return must also include any resulting adjustments to taxable income. You do not need IRS consent. Once made, the revocation is irrevocable.
Recapture the Section 179 Deduction
One thing you need to be aware of is that you may have to recapture the section 179 deduction if, in any year during the property’s recovery period, the percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you must include the recapture amount as ordinary income. You also must increase the basis of the property by the recapture amount.
Section 179 example 6: You purchase equipment for $15,000 to be used 100% in your business and you elect to expense the total cost under section 179. During the taxable year, your net income is reduced by $15,000.
In the second year, your personal use of this equipment increases substantially so that the business use is only 25%. As a result of this increase, you now have to “recapture” the original $15,000 section 179 expense (less any normal depreciation that would have been allowed) as ordinary income.
Assuming the asset has a seven year recovery period, your recapture would look like this:
|Depreciation allowed in year one||- $2,143.50 ($15,000 x 14.29%)|
|Depreciation allowed in year two (25% business use)||- $918.38 ($15,000 x 24.49% x 25%)|
|Recapture income||$ 11,938.12|
As you can see by the example above, you will have to report $11,938.12 in income for the year meaning you will have to pay the IRS for the income tax on that amount out of your pocket! You may even owe interest and penalties if your withholding or estimates don’t meet the minimum tax payments required.
It’s easy to see that you need to be sure that the business use of your asset will remain above 50% throughout the assets recovery period if you elect to use the section 179 deduction. If the use of the asset falls below 50% you find yourself forced to recognize unexpected income and have to pay taxes as a result.
Final Point About the Section 179 Deduction
Electing the 179 deduction is not always to your advantage. The election may reduce or eliminate your eligibility to claim the earned income credit, reduce your coverage under the social security system, and prevent you from fully using your exemptions and deductions.
This is especially true if you are going to make more money in future years. You will lose the ability to take deductions against this future income if you elect to take the full deduction in a given year.
For further information on the Section 179 Election, you can visit the IRS website “Electing the Section 179 Deduction”.