Section 179 of the Internal Revenue Code allows businesses to deduct the full cost of certain depreciable capital assets such as furniture or equipment in the tax year they were placed in service as an expense not chargeable to a capital account as opposed to depreciating them over the term of their useful life (e.g. 3 years, 5 years, 7 years, 10 years, etc.). 26 U.S.C. §179(a). This tax deduction is a powerful tool that helps business owners save money sooner rather than later. This blog article will explain the rules surrounding the Section 179 deduction and how it can work for you.
WHAT PROPERTY IS SUBJECT TO SECTION 179?
Section 179 property includes property which is ALL OF THE FOLLOWING:
- TANGIBLE PERSONAL PROPERTY (INCLUDING COMPUTER SOFTWARE) OR QUALIFIED REAL PROPERTY: Tangible personal property includes furniture, office equipment, machines, vehicles and even computer software. 26 U.S.C. §179(d)(1)(A). It does not include intangible personal property such as patents and copyrights. Land and buildings are generally excluded, but it does allow for “qualified real property” which includes any ‘qualified improvement property’ made by the taxpayer to an interior portion of non-residential real property (excluding building enlargement, elevators, escalators, and modifications to internal structural framework). 26 U.S.C. §179(d)(1)(B); 26 U.S.C. §179(e)(1). Qualified real property also includes roofs, heating, ventilation, air-conditioning, fire protection and alarm systems, and security systems added as improvements to nonresidential real property. 26 U.S.C. §179(e)(2).
- PURCHASED OR ACQUIRED FROM A NON-RELATED PARTY: The property must be purchased or acquired in the tax year. 26 U.S.C. §179(d)(1)(C). Purchase describes any kind of acquisition of the property, but only if ALL OF THE FOLLOWING-
- The property is not acquired from a spouse, ancestors, lineal descendants, or a corporation or partnership that the taxpayer owns more than 50% of its value. 26 U.S.C. §179(d)(2)(A).
- The property is not acquired by one component member of a controlled group from another component member of the same controlled group. 26 U.S.C. §179(d)(2)(B). “Controlled group” is an entity where the taxpayer owns more than 80% of the value of its ownership. 26 U.S.C. §179(d)(7).
- The basis of the property in the hands of the person acquiring it is not determined in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or from a decedent’s estate. 26 U.S.C. §179(d)(2)(C).
- USED MORE THAN 50% IN THE ACTIVE CONDUCT OF A TRADE OR BUSINESS: The property must be used in the active conduct of a trade or business. 26 U.S.C. §179(d)(1)(C).
WHAT ARE THE LIMITATIONS ON THE SECTION 179 DEDUCTION?
Any Section 179 property treated as an expense shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service. 26 U.S.C. §179(a). This means that if the property was purchased in 2021 but not “placed in service” and used until 2022, then the Section 179 deduction would only apply in 2022.
The maximum aggregate amount of qualifying Section 179 property you can deduct in 2022 is $1,080,000.00. 26 U.S.C. §179(b)(1). However, if the amount of qualifying Section 179 property placed in service in 2022 exceeds $2,700,000.00, then the maximum deduction allowed is reduced on a dollar-by-dollar basis to the extent that the amount of property exceeds $2,700,000.00. 26 U.S.C. §179(b)(2). For example, if a taxpayer placed $3,000,000.00 of qualifying property in service in 2022, then the Section 179 deduction is reduced by $300,000.00 (the amount over the $2,700,000.00 limit) to $780,000.00.
In addition, the maximum possible Section 179 deduction “shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year.” 26 U.S.C. §179(b)(3)(A). For example, if a taxpayer only generates $500,000.00 of income from his trade or business and places $600,000.00 of qualifying Section 179 property into service, then his Section 179 deduction is limited to $500,000.00. However, you can carry forward the amount of Section 179 deduction disallowed due to the taxable income limitation to the next tax year, provided that the taxpayer has sufficient income in that year to use it. 26 U.S.C. §179(b)(3)(B).
In the case of a married couple filing separate returns for the taxable year, both individuals shall be treated as 1 taxpayer for purposes of the Section 179 deduction unless they elect otherwise, of which then 50 percent of the possible Section 179 deduction is allocated to each of them. 26 U.S.C. §179(b)(4).
The amount of the Section 179 deduction limits is adjusted for inflation each year. 26 U.S.C. §179(b)(6).
WHAT IS THE SECTION 179 LIMITATION ON SPORT UTILITY VEHICLES?
“The cost of any sport utility vehicle for any taxable year which may be taken into account [for the Section 179 deduction] shall not exceed $25,000.” 26 U.S.C. §179(b)(5)(A).
A “sport utility vehicle” means any 4-wheeled vehicle:
- “[W]hich is primarily designed or which can be used to carry passengers over public streets, roads, or highways (except any vehicle operated exclusively on a rail or rails)”. 26 U.S.C. §179(b)(5)(B)(i)(I).
- Which is not considered a “luxury automobile”. 26 U.S.C. §179(b)(5)(B)(i)(II).
- “[W]hich is rated at not more than 14,000 pounds gross vehicle weight.” 26 U.S.C. §179(b)(5)(B)(i)(III).
However, a “sport utility vehicle” does not include any vehicle which is ANY OF THE FOLLOWING:
- “[I]s designed to have a seating capacity of more than 9 persons behind the driver’s seat.” 26 U.S.C. §179(b)(5)(B)(ii)(I).
- “[I]s equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment.” 26 U.S.C. §179(b)(5)(B)(ii)(II).
- “[H]as an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.” 26 U.S.C. §179(b)(5)(B)(ii)(III).
HOW DO YOU CLAIM THE SECTION 179 DEDUCTION?
The Section 179 deduction is claimed on Part I of Form 4562 (Depreciation and Amortization) that is filed with your income tax return. You are required to specify the items of Section 179 property to which the election applies and the portion of the cost of each such item which is to be taken into account. 26 U.S.C. §179(c)(1)(A).
The Section 179 deduction does not apply to estates and trusts. 26 U.S.C. §179(d)(4).
OUR TAX PROFESSIONALS ARE AVAILABLE TO ASSIST YOU
The Section 179 deduction is a good opportunity to push down your tax liability for the year if you qualify.
If you have further questions or need help filing your taxes, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.