Section 179 Deduction

Under section 179 of the Internal Revenue Code, you can choose to recover the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This part of the chapter explains the rules for the section 179 deduction. It explains what property qualifies for the deduction, the limits that may apply, and how to elect the deduction. You can recover through depreciation certain costs not recovered through the section 179 deduction.

What Property Qualifies?

To qualify for the section 179 deduction, your property must meet all the following requirements.

1. It must be eligible property.
2. It must be acquired for business use.
3. It must have been acquired by purchase.
4. It must not be excepted property.

Eligible Property

To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.

1. Tangible personal property.
2. Other tangible property (except buildings and their structural components) used as:
1. 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) above, or
3. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
3. Single purpose agricultural (livestock) or horticultural structures.
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. It includes the following property.

• Machinery and equipment.
• Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment.
• Gasoline storage tanks and pumps at retail service stations.
• Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals.

Land and land improvements, such as buildings and other permanent structures and their components, are real property, not personal property. Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. However, agricultural fences do qualify as section 179 property.

Facility used for the bulk storage of fungible commodities. A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 deduction if it is used in connection with any of the activities listed earlier in item (2)(a). Bulk storage means the storage of a commodity in a large mass before it is used.

Grain bins. A grain bin is an example of a storage facility that is qualifying section 179 property. It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities.

Single purpose agricultural or horticultural structures. A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 deduction.

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

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

For this purpose, livestock includes poultry.

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.

• A greenhouse specifically designed, constructed, and used for the commercial production of plants.
• 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, the work space can be used only for the following activities.

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

Property Acquired for Business Use

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property 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, does not qualify.

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. If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your section 179 deduction.

Property Acquired by Purchase

To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.

Property is not considered acquired by purchase in the following situations.

1. It is acquired by one member of a controlled group from another member of the same group.
2. Its 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. It 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.

Excepted Property

Even if the requirements explained in the preceding discussions are met, you cannot elect the section 179 deduction for the following property.

• Certain property you lease to others (if you are a noncorporate lessor).
• Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.
• Air conditioning or heating units.
• Property used predominantly outside the United States (except property described in section 168(g)(4) of the Internal Revenue Code).
• Property used by certain tax-exempt organizations.
• Property used by governmental units.
• Property used by foreign persons or entities.

How Much Can You Deduct?

Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. These limits apply to each taxpayer, not to each business. However, see Married individuals under Dollar Limit, later.

Use Part I of Form 4562 to figure your section 179 deduction.

Trade-in of other property. If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. 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.

Depreciating the excess cost. If you deduct only part of the cost of your qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. To figure your basis for depreciation using MACRS (discussed later), you must subtract the section 179 deduction from the cost of the qualifying property. You use the result to figure any depreciation deduction. For information on how to figure depreciation, see Figuring Depreciation Under MACRS, later.

Dollar Limit

The total amount you can elect to deduct under section 179 for 2001 cannot be more than $24,000. 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 in any way, as long as the total deduction is not more than $24,000. You do not have to claim the full $24,000.

Beginning in 2003, the total amount you can elect to deduct under section 179 will increase to $25,000.

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 $20,000 and a mower for $6,200 for use in your farming business. You elect to deduct the entire $6,200 for the mower and $17,800 for the tractor, a total of $24,000. This is the most you can deduct. Your $6,200 deduction for the mower completely recovered its cost. Your basis for depreciation is zero. The basis of your tractor for depreciation is $2,200. You figure this by subtracting the amount of your section 179 deduction, $17,800, from the cost of the tractor, $20,000.

Reduced dollar limit for cost exceeding $200,000. If the cost of your qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of cost over $200,000. If the cost of your section 179 property placed in service during 2001 is $224,000 or more, you cannot take a section 179 deduction and you cannot carry over the cost that is more than $224,000.

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 his dollar limit to $17,000 ($24,000 - $7,000).

Additional limit for passenger automobiles. For passenger automobiles placed in service in 2001, your total section 179 and depreciation deductions generally cannot be more than $3,060. For more information, see Maximum Depreciation Deduction under Do the Passenger Automobile Limits Apply, later.

Married individuals. 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 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 dollar limit, including the reduction for costs over $200,000. You must allocate the limit amount (after any reduction) between you. You must allocate 50% to each, unless you both elect a different allocation. 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 dollar limit on the joint return is the lesser of the following amounts.

• The dollar limit (after reduction for any cost of section 179 property over $200,000).
• The total cost of section 179 property you and your spouse elected to expense on your separate returns.

Business Income Limit

The total cost you can deduct each year after you apply the dollar limit 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.

Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. See Carryover of disallowed deduction, later.

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

• 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.

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.
• Any unreimbursed employee business expenses.

Two different taxable income limits. In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). 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 business 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.

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 business 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. If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Your selections must be 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 regard to both a section 179 deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Her section 179 deduction was limited to $6,000. The $2,000 cost that was not allowed as a section 179 deduction (because of the business 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 regard to both a section 179 deduction for the cost of the machine and 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 business 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 more information on figuring the carryover.

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 in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. To determine any reduction in the dollar limit for costs over $200,000, 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 dollar limit, you apply the business income limit to any remaining section 179 costs. For more information, see chapter 2 of Publication 946.

How Do You Elect the Deduction?

You elect the section 179 deduction by completing Part I of Form 4562.

If you elect the deduction for listed property (described later), complete Part V of Form 4562 before completing Part I.

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. (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 6 months of the due date of the return (excluding extensions). For more information, see the instructions for Part I of Form 4562.

When Must You Recapture the Deduction?

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 include the recapture amount as ordinary income. You also increase the basis of the property by the recapture amount. Recovery periods for property are discussed later.

If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Instead, use the rules for recapturing depreciation explained in chapter 11 under Section 1245 Property.

Figuring the recapture amount. To figure the amount to recapture, take the following steps.

1. Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Begin with the year you placed the property in service and include the year of recapture.
2. Subtract the depreciation figured in (1) from the section 179 deduction you claimed. The result is the amount you must recapture

Example. In 1999, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. The property is not listed property. He elected a $5,000 section 179 deduction for the property. He used the property only for business in 1999 and 2000. During 2001, he used the property 40% for business and 60% for personal use. He figures his recapture amount as follows.

Paul must include $1,375 in income for 2001.

Where to report recapture. Report any recapture of the section 179 deduction as ordinary income in Part IV of Form 4797 and Schedule F (Form 1040).

Previous| First | Next

Publication Index | IRS-Forms Main | Home