Tax Information: What Is IRS Section 179?

Learn about IRS Section 179, its benefits, guidelines, and limitations

What is IRS Section 179?

Section 179 of the Internal Revenue Code provides a valuable deduction on equipment purchases for business owners. Prior to 2003, the maximum amount that could be expensed (deducted from taxable income) immediately was $25,000. For 2003, 2004 and 2005, this limit has been raised to $100,000. After 2005, the limit will return to its fixed level of $25,000. This means there are big incentives for business owners to take advantage of the opportunity to purchase and expense property before the $100,000 level drops back down.

Tangible personal property such as machinery, computers, off-the-shelf computer software, office equipment and some vehicles can be expensed if installed by December 31st. Equipment placed in service on the last day of the taxable year can still be fully expensed and does not need to be prorated. To qualify for the deduction, business use of the assets must exceed 50% in the year they are placed into service. If business use is less than 100%, but greater than 50%, the deduction is limited to the business use portion. Your deduction is also limited to your aggregate taxable income from all your active businesses. In short, your Section 179 deduction cannot create a taxable loss for your business. In addition to the increased deduction, there is a 50% depreciation bonus for qualified capital investments on equipment and an accelerated five year depreciation schedule. Taxpayers may still elect to use the previous depreciation bonus of 30% if elected. A limit on the amount of total deductible property purchased is set at $400,000 through 2005. For every dollar spent beyond this amount your $100,000 deduction is reduced by a dollar. For instance, equipment purchases totaling $412,000 in the taxable year would reduce the eligible deductible amount to $88,000. The $400,000 limit will recede to $200,000 after 2005.

Section 179 can have major drawbacks if not used properly. The recapture rule states that if business use drops below 50% after you have already claimed the deduction and within the asset's recovery period (the length of time it will take to fully depreciate), you must claim the entire expense as ordinary income. Normal depreciation is not taxable, but there may be extra income tax or penalties associated with the recapture.

Commonly called the SUV Tax Deduction, Section 179 has been highly controversial since the 2003 raise of the deduction limit. To qualify for the full deduction, a vehicle must have a gross weight (GVWR) of at least 6,000 pounds. Other types of smaller vehicles are subject to much more stringent limitations. This was originally implemented back in the 1970's to enable farmers and people who were self-employed to purchase trucks or vans without having to pay a luxury tax. This loophole was quickly exploited by accountants, salespeople and self-employed professionals to purchase luxury SUV's and receive a huge tax break. Watchdog organizations and environmental groups soon pressured Congress to reverse the ruling. With the passage of the American Jobs Creation Act of 2004, the $100,000 limit goes back to $25,000, but the 50% bonus depreciation and five-year depreciation schedule will remain in effect.

To take advantage of the Section 179 deduction, you must elect to do so on Form 4562. When filing, be sure to attach it to either your original tax return or an amended return before the due date.

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