Section 179 Deduction

This part of the chapter explains the rules for the section 179 deduction. It explains what a section 179 deduction is, the costs that can be deducted, what property qualifies for the deduction, limits that may apply, and how to claim the deduction. You can recover through depreciation certain costs not recovered through the section 179 deduction.

Section 179 Deduction Defined

Section 179 of the Internal Revenue Code allows you to elect to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions.

What Costs Can and Cannot Be Deducted

You can claim the section 179 deduction for the cost of qualifying property acquired for use in your trade or business. You cannot claim the deduction for the cost of property you hold only for the production of income.

For information on property held for the production of income, see Production of income, later.

Acquired by Purchase

Only the cost of property you acquired by purchase for use in your business qualifies for the section 179 deduction. The cost of property acquired from a related person or group may not qualify. See Nonqualifying Property, later.

Acquired by Trade

If you buy an asset with cash and a trade-in, you can claim a section 179 deduction based only on the cash you pay. For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 deduction does not include the adjusted basis of the old tractor you trade for the new tractor. For more information on figuring your adjusted basis, see Adjusted Basis in chapter 7.

Example. J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. They received an $8,000 trade-in for the old cultivators and paid $5,200 cash for the new cultivator. J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $15,000. They received a $5,000 trade-in and paid $10,000 cash for the new pickup truck.

J-Bar Farms' basis in the new property includes both the adjusted basis of the property traded and the cash paid. However, only the cash paid by J-Bar qualifies for the section 179 deduction. J-Bar's business costs that qualify for a section 179 deduction are $15,200 ($5,200 + $10,000), the part of the cost of the new property not determined by the property traded.

Qualifying Property

Qualifying section 179 property is depreciable property and includes the following.

1. Tangible personal property.
2. Other tangible property (except most buildings and their structural components) listed below.
   1. Property used as an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services.
   2. A research facility used in connection with any of the activities in (a).
   3. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state).
3. Single purpose agricultural (livestock) or horticultural structures (defined later).
4. Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

Tangible personal property. Tangible personal property is any tangible property that is not real property. Machinery and equipment are examples of tangible personal property.

Land and land improvements are not tangible personal property and they do not qualify as section 179 property. Items such as buildings and other permanent structures and their components are real property. Non-agricultural fences, swimming pools, paved parking areas, wharfs, docks, bridges, and fences are examples of land improvements. However, agricultural fences do qualify as section 179 property.

Business property. All business property, other than structural components, contained in or attached to a building is tangible personal property. Milk tanks, automatic feeders, barn cleaners, and office equipment are tangible personal property.

Livestock. Livestock is qualifying property. For this purpose, livestock includes horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

Single purpose agricultural (livestock) or horticultural structures. A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 deduction. For purposes of determining whether a structure is a single purpose agricultural structure, poultry is considered livestock.

Agricultural structure. A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following purposes.

1. To house, raise, and feed a particular type of livestock and its produce.
2. To house the equipment, including any replacements, needed to house, raise, or feed the livestock.

Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock.

Horticultural structure. A single purpose horticultural structure is either of the following.

1. A greenhouse specifically designed, constructed, and used for the commercial production of plants.
2. A structure specifically designed, constructed, and used for the commercial production of mushrooms.

Use of structure. A structure must be used only for the purpose that qualified it. For example, a hog barn will not be qualifying property if you use it to house poultry. Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property.

If a structure includes work space, that structure is a single purpose agricultural or horticultural structure if the work space is used only for the following.

1. Stocking, caring for, or collecting livestock or plants or their produce.
2. Maintaining the enclosure or structure.
3. Maintaining or replacing the equipment or stock enclosed or housed in the structure.

Partial business use. When you use property for business and nonbusiness purposes, you can elect the section 179 deduction only if you use it more than 50% for your business in the year you place it in service. You figure the part of the cost of the property for business use by multiplying the cost of the property by the percentage of business use. The result is your business cost, which you use to figure your section 179 deduction.

Nonqualifying Property

Generally, the section 179 deduction cannot be claimed on the cost of any of the following.

• Property you hold only for the production of income.
• Real property, including buildings and their structural components.
• Property you acquired from certain groups or persons.
• Air conditioning or heating units.
• Certain property used predominately outside the United States
• Property used predominately to furnish lodging or in connection with the furnishing of lodging.
• Property used by foreign persons or entities.
• Certain property you lease to others (if you are a noncorporate lessor).

For more information on nonqualifying property, see Nonqualifying Property in chapter 2 of Publication 946.

For the kind of leased property on which you can claim the section 179 deduction, see Qualifying Property in chapter 2 of Publication 946.

Production of income. Property you hold for the production of income includes investment property, rental property (if renting property is not your trade or business), and property that produces royalties. If you use property in the active conduct of a trade or business, you do not hold it only for the production of income.

Acquired from certain groups or persons. Property does not qualify for the section 179 deduction if any of the following apply.

1. The property is acquired by one member of a controlled group from another member of the same group.
2. The property's basis is determined in either of the following ways.
   1. In whole or in part by its adjusted basis in the hands of the person from whom it was acquired.
   2. Under stepped-up basis rules for property acquired from a decedent.
3. The property is acquired from a related person. A related person generally means a member of your immediate family (including your spouse, an ancestor, and a lineal descendant) or a partnership or corporation in which you hold an interest.

For more information on related persons, see Publication 946.

How To Make the Election

You make the election by taking your deduction on Form 4562. You attach and file Form 4562 with either of the following.

• Your original tax return filed for the year the property was placed in service (whether or not you filed it timely).
• An amended return filed by the due date (including extensions) for your return for the year the property was placed in service. In other words, you cannot make an election for the section 179 deduction on an amended return filed after the due date (including extensions) of the original return.

However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). For more information, see the instructions for Part I of Form 4562.

How To Figure the Deduction

The total business cost you can elect to deduct under section 179 for 2000 cannot be more than $20,000. This maximum dollar limit applies to each taxpayer, not to each business. You do not have to claim the full $20,000. You can decide how much of the business cost of your qualifying property you want to deduct under section 179. You may be able to depreciate any cost you do not deduct under section 179. To figure depreciation, see MACRS, later.

If you acquire and place in service more than one item of qualifying property during the year, you can divide the deduction among the items in any way, as long as the total deduction is not more than $20,000.

If you have only one item of qualifying property and it costs less than $20,000, your deduction is limited to the lesser of the following.

• Your taxable income from your trade or business. (This limit is discussed later.)
• The cost of the item.

You must figure your section 179 deduction before figuring your depreciation deduction.

You must subtract the amount you elect to deduct under section 179 from the business/investment cost of the qualifying property. The result is your unadjusted basis and the amount you use to figure any depreciation deduction.

You cannot take depreciation on the cost of property you deduct under section 179.

Example. This year, you bought and placed in service a tractor for $16,000 and a mower for $6,200 for use in your farming business. You elect to deduct the entire $6,200 for the mower and $13,800 for the tractor, a total of $20,000. This is the most you can deduct. Your $6,200 deduction for the mower completely recovered its cost. The cost of your tractor is reduced by $13,800. Its remaining basis for depreciation is $2,200. You figure this by subtracting the amount of your section 179 deduction, $13,800, from the cost of the tractor, $16,000.

Deduction Limits

Your section 179 deduction cannot be more than the business cost of the qualifying property. In addition, in figuring your section 179 deduction, you must apply the following limits.

• Maximum dollar limit.
• Investment limit.
• Taxable income limit.

Maximum dollar limit. The total cost you can elect to deduct for 2000 cannot be more than $20,000. This maximum dollar limit is reduced if you go over the investment limit (discussed later) in any year.

The total deductible cost of section 179 property increases in future years as shown next.

Passenger automobiles. For passenger automobiles placed in service in 2000, your total section 179 deduction and depreciation cannot be more than $3,060. For more information, see Maximum deductions for 2000 under Special Rules for Passenger Automobiles, later.

Investment limit. If the cost of your qualifying section 179 property placed in service in a year is over $200,000, reduce the maximum dollar limit for each dollar over $200,000 (but not below zero). If the cost of your section 179 property placed in service during 2000 is $220,000 or more, you cannot take a section 179 deduction and you cannot carry over the cost that is more than $220,000.

Example. This year, James Smith placed in service machinery costing $207,000. Because this cost is $7,000 more than $200,000, he must reduce the maximum dollar limit of $20,000 by $7,000. If his taxable income is at least $13,000, James can claim a $13,000 section 179 deduction for this year.

Taxable income limit. The total cost you can deduct each year is limited to the taxable income from the active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.

Figure taxable income for this purpose by totaling the net income (or loss) from all trades and businesses you actively conducted during the year. In addition to income from a sole proprietorship, partnership or S corporation, items of income derived from a trade or business actively conducted by you also include the following.

• Section 1231 gains (or losses) as discussed in chapter 11.
• Interest from working capital of your trade or business.
• Wages, salaries, tips, or other pay earned as an employee.

When figuring taxable income, do not take into account any unreimbursed employee business expenses you may have as an employee.

In addition, figure taxable income without regard to any of the following.

• The section 179 deduction.
• The self-employment tax deduction.
• Any net operating loss carryback or carryforward.

Carryover of disallowed deduction. You can carry over the cost of any section 179 property you elected to expense but were unable to because of the taxable income limit.

The amount you carry over is used in determining your section 179 deduction in the next year. However, it is subject to the limits in that year. You can select the properties for which all or a part of the cost will be carried forward, provided the reasons for your decisions are shown in your books and records.

Example. Last year, Joyce Jones placed in service a machine that cost $8,000. The taxable income from her business (determined without a section 179 deduction for the cost of the machine and without the self-employment tax deduction) was $6,000. Her section 179 deduction is limited to $6,000. The $2,000 cost that was not allowed as a section 179 deduction (because of the taxable income limit) is carried to this year.

This year, Joyce placed another machine in service that cost $9,000. Her taxable income from business (determined without a section 179 deduction for the cost of the machine and without the self-employment tax deduction) is $10,000. Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the taxable income limit. She can carry over the balance of $1,000 to next year.

See Carryover of disallowed deduction in chapter 2 of Publication 946 for information on figuring the carryover.

Two different taxable income limits. The section 179 deduction is subject to a taxable income limit. You also may have to figure another deduction (for example, charitable contributions) that has a limit based on taxable income. If you have to figure the limit for this other deduction taking into account the section 179 deduction, complete the following steps.

Example. During the year, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $10,000. It elects to expense as much as possible under section 179. The XYZ corporation also gave a charitable contribution of $1,000 during the year. A corporation's deduction for charitable contributions cannot be more than 10% of its taxable income, figured after subtracting any section 179 deduction. The taxable income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $12,000. XYZ figures its section 179 deduction and its deduction for charitable contributions as follows.

• Step 1. Taxable income figured without either deduction is $12,000.
• Step 2. Using $12,000 as taxable income, XYZ's hypothetical section 179 deduction is $10,000.
• Step 3. $2,000 ($12,000 - $10,000).
• Step 4. Using $2,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $200.
• Step 5. $11,800 ($12,000 - $200).
• Step 6. Using $11,800 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Because the taxable income is at least $10,000, XYZ can take a $10,000 section 179 deduction.
• Step 7. $2,000 ($12,000 - $10,000).
• Step 8. Using $2,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $200.

Married filing joint or separate returns. If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately.

Joint return. If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the maximum dollar limit, regardless of which of you purchased the property or placed it in service.

Separate returns. If you and your spouse file separate returns, you are treated as one taxpayer for the maximum dollar limit and for the $200,000 investment limit. Unless you elect otherwise, 50% of the maximum dollar limit (after applying the investment limit) will be allocated to each of you. If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you.

Joint return after separate returns. If you and your spouse elect to file a joint return after the due date for filing the return, the maximum dollar limit on the joint return is the lesser of the following.

• The maximum dollar limit (after the investment limit).
• The total cost of section 179 property you and your spouse elected to expense on your separate returns.

Partnerships and S corporations. The section 179 deduction limits apply both to the partnership or S corporation and to each partner or shareholder. The partnership or S corporation determines its section 179 deduction subject to the limits. It then allocates the deduction among its partners or shareholders.

If you are a partner or shareholder, you add the amount allocated from the partnership or S corporation to any 179 costs not related to the partnership or S corporation and then apply the maximum dollar limit to this total. To determine if you exceed the $200,000 investment limit, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. After you apply the maximum dollar limit and investment limit, you apply the taxable income limit to any remaining section 179 costs. For more information, see chapter 2 of Publication 946.

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