2. Electing the Section 179 Deduction
Introduction
Under section 179 of the Internal Revenue Code, you can choose 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. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
Estates and trusts cannot elect the section 179 deduction.
Electing the section 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 chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction, and how to elect it. It also explains when and how to recapture the deduction.
Useful Items You may want to see:
Publication
- 537 Installment Sales
- 544 Sales and Other Dispositions of Assets
- 954 Tax Incentives for Empowerment Zones and Other Distressed Communities
Form (and Instructions)
- 4562 Depreciation and Amortization
- 4797 Sales of Business Property
See chapter 7 for information about getting publications and forms.
What Property Qualifies?
- Adjusted basis
- Basis
- Class life
- Structural components
- Tangible property
To qualify for the section 179 deduction, your property must meet all the following requirements.
- It must be eligible property.
- It must be acquired for business use.
- It must have been acquired by purchase.
- It must not be excepted property.
The following discussions provide information about these requirements.
Eligible Property
To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.
- Tangible personal property.
- Other tangible property (except buildings and their structural components) used as:
- An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
- A research facility used in connection with any of the activities in (a) above, or
- A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
- Single purpose agricultural (livestock) or horticultural structures.
- 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 refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.
- Gasoline storage tanks and pumps at retail service stations.
- Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.
Land and land improvements, such as buildings and other permanent structures and their components, are real property, not personal property. Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences.
The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law.
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.
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 pen 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 both business and nonbusiness purposes, you can elect the section 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. Use the resulting business cost to figure your section 179 deduction.
Example. May Oak bought and placed in service an item of section 179 property costing $11,000. She used the property 80% for her business and 20% for personal purposes. The business part of the cost of the property is $8,800 (80% × $11,000).
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.
- It is acquired by one member of a controlled group from another member of the same group.
- Its basis is determined either -
- In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or
- Under the stepped-up basis rules for property acquired from a decedent.
- It is acquired from a related person.
Related persons. Related persons are described under Related persons in chapter 1 in the discussion on property owned or used in 1986 under Can You Use MACRS To Depreciate Your Property. However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears.
Example. Ken Larch is a tailor. He bought two industrial sewing machines from his father. He placed both machines in service in the same year he bought them. They do not qualify as section 179 property because Ken and his father are related persons. He cannot claim a section 179 deduction for the cost of these machines.
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 (except property used in connection with the production of income subject to the tax on unrelated trade or business income).
- Property used by governmental units.
- Property used by foreign persons or entities.
Leased property. Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. (This rule does not apply to corporations.) However, you can claim a section 179 deduction for the cost of the following property.
- Property you manufacture or produce and lease to others.
- Property you purchase and lease to others if both the following tests are met.
- The term of the lease (including options to renew) is less than half of the property's class life.
- For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property.
Property used for lodging. Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. However, this does not apply to the following types of property.
- Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities.
- Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients.
- Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures.
- Any energy property.
Energy property. Energy property is either of the following types of equipment.
- Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat.
- Equipment used to produce, distribute, or use energy derived from a geothermal deposit. For electricity generated by geothermal power, this applies only to its production, distribution, or use up to (but not including) the electrical transmission stage.
If you did not construct, reconstruct, or erect the equipment, the original use of the property must begin with you. The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property.
Energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990).
How Much Can You Deduct?
- Adjusted basis
- Basis
- Placed in service
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.
Example. Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van.
Silver Leaf's basis in the new property includes both the adjusted basis of the property traded and the cash paid. However, only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200).
Depreciating any remaining cost. If you deduct only part of the cost of your qualifying property as a section 179 deduction, you generally can take the special depreciation allowance (or Liberty Zone depreciation allowance) and MACRS depreciation on the cost you do not deduct. To figure your basis for depreciation (discussed in chapter 3) used to determine the special depreciation allowance (or Liberty Zone depreciation allowance), you must subtract the amount of the section 179 deduction from the cost of the qualifying property. The result is then reduced by the amount of your allowance and the remaining cost is used to figure any MACRS depreciation deduction. For information on how to figure the special depreciation allowance (or Liberty Zone depreciation allowance) and MACRS depreciation, see chapters 3 and 4, respectively.
Dollar Limit
The total amount you can elect to deduct under section 179 for 2002 generally 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.
The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year.
Beginning in 2003, the total amount you can elect to deduct under section 179 will increase to $25,000.
After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction.
Example. In 2002, you bought and placed in service a $25,000 forklift and a $1,500 circular saw for your business. You elect to deduct $22,500 for the forklift and the entire $1,500 for the saw, a total of $24,000. This is the maximum amount you can deduct. Your $1,500 deduction for the saw completely recovered its cost. Your basis for depreciation is zero. The basis for depreciation of your forklift is $2,500. You figure this by subtracting your $22,500 section 179 deduction for the forklift from the $25,000 cost of the forklift.
Under certain circumstances, the general dollar limit on the section 179 deduction must be reduced or increased or there may be an additional dollar limit. The general dollar limit is affected by any of the following situations.
- The cost of qualifying property you placed in service during the year is more than $200,000.
- You placed qualified property in service in the New York Liberty Zone.
- Your business is an enterprise zone business.
- You placed in service a passenger automobile.
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 2002 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, Jane Ash placed in service machinery costing $207,000. This cost is $7,000 more than $200,000, so she must reduce her dollar limit to $17,000 ($24,000 - $7,000).
Liberty Zone Property
Certain benefits, including an increased section 179 deduction, are available for certain property you place in service in the New York Liberty Zone (Liberty Zone). For a definition of the New York Liberty Zone, see Area defined in the discussion on excepted property under What Is Qualified Property? in chapter 3.
Reduced dollar limit. You take into account only 50% (instead of 100%) of the cost of qualified Liberty Zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $200,000 (explained earlier). See Qualified property under Increased dollar limit, next, for an explanation of property that qualifies.
Increased dollar limit. The dollar limit on the section 179 deduction is increased for qualified property. The increase is the smaller of the following amounts.
- $35,000.
- The cost of section 179 property that is qualified property (discussed next) placed in service during the year.
Qualified property. To qualify for the increased section 179 deduction, your property must be section 179 property that is either:
- Qualified Liberty Zone property, or
- Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance.
See What Is Qualified Liberty Zone Property? in chapter 3 for an explanation of qualified Liberty Zone property. See What Is Qualified Property? in chapter 3 for an explanation of property eligible for the special depreciation allowance.
Enterprise Zone Businesses
Certain benefits, including an increased section 179 deduction, are available to enterprise zone businesses for certain property placed in service in an empowerment zone.
Reduced dollar limit. You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $200,000 (explained earlier).
Increased dollar limit. The dollar limit on the section 179 deduction is increased if your business qualifies as an enterprise zone business. The increase is the smaller of the following amounts.
- $35,000.
- The cost of section 179 property that is also qualified zone property.
For more information, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.
Additional Limit for Passenger Automobiles
For a passenger automobile that is qualified property (as explained in chapter 3 under What Is Qualified Property?) placed in service in 2002, the total of the section 179 and depreciation deductions (including the special depreciation allowance) generally cannot be more than $7,660 if you claim the special depreciation allowance for the automobile. If you elected not to claim the special depreciation allowance for the automobile or the automobile is not qualified property, the limit is generally $3,060. For more information, see Do the Passenger Automobile Limits Apply? in chapter 5.
Married Individuals
If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately.
Joint returns. 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 dollar limit (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.
Example. Jack Elm is married. He and his wife file separate returns. Jack bought and placed in service $200,000 of qualified farm machinery in 2002. His wife has her own business, and she bought and placed in service $5,000 of qualified business equipment. Their combined dollar limit is $19,000. This is because they must figure the limit as if they were one taxpayer. They reduce the $24,000 dollar limit by the $5,000 excess of their costs over $200,000.
They elect to allocate the $19,000 dollar limit as follows.
- $14,250 (75%) to Mr. Elm's machinery.
- $4,750 (25%) to Mrs. Elm's equipment.
If they did not make an election to allocate their costs in this way, they would have to allocate $9,500 ($19,000 × 50%) to each of them.
Joint return after filing separate returns. If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your 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.
Example. The facts are the same as in the previous example except that Jack elected to deduct $4,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. After the due date of their returns, they file a joint return. Their dollar limit for the section 179 deduction is $6,000. This is the lesser of the following amounts.
- $19,000 - The dollar limit less the cost of section 179 property over $200,000.
- $6,000 - The total they elected to expense on their separate returns.
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