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 total amount you can elect to deduct cannot be more than
$125,000 in 2007.  If you acquire and place in service more than
one item of qualifying property during the year, you can allocate the
section 179 deduction among the items any way, as long as the
total deduction is not more than $125,000.  If you make the election
for only part of the cost of the property, the amount that you elect to
deduct reduces the amount that you can depreciate, but you can
claim depreciation on what's left. 

Note that the 2007 Section 179 dollar limit is $3,060 for cars placed in
service during 2006.  For certain SUV's the expensing limit is $25,000.

The Section 179 expensing limit will be adjusted for inflation in 2007.
After 2007, the limit is scheduled to fall to $25,000.

If the total cost of your qualifying section 179 deduction for 2007 is
over $500,000, you must reduce the dollar limit (but not below zero)
by the amount of cost over $500,000.  In other words, the $125,000
limit is reduced dollar for dollar by the cost of the property that
exceeds $500,000.  If the cost of it is $625,000 or more, you cannot
take the 179 deduction. 

Example: In 2007, you placed in service machinery costing $550,000. 
This cost is $50,000 more than $500,000, so you must reduce your
dollar limit to $75,000 ($125,000 - $50,000).

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 2007.    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 2008.  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 2007.


Section 179 Qualifications
The property must be purchased for use in a trade or business (not
an investment activity) in 2007.  "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.

Example: You purchase a computer in 2005 and use it for personal use
but then began to use it for business in 2007.  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 2007 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 $125,000, you compute depreciation on the cost of the
property less the amount of the first-year deduction.

Example:  In 2007, Justin Zimmerman placed into service a $95,000 machine
and $37,000 of furniture.  He decided to deduct as a first year expense the
full $95,000 for the machine and $30,000 of the furniture, for a total of
$125,000, which is the maximum first-year deduction.  The $95,000
deduction for the cost of the machine has been fully recovered by Justin. 
The cost of the furniture is reduced by $30,000, giving Justin a depreciable
basis of $7,000 ( $37,000 - $30,000).

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.

Example: 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. 

Example: 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 2009, 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.

Example: 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:

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.

When in doubt, discuss with your tax accountant!


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