Qualifying Your Property for the Section 179 Tax Deduction
What Property Qualifies for the Section 179 Deduction?
In order to claim the Section 179 deduction, the property must have been acquired by purchase for use in a trade or business, and must be what the Internal Revenue Service (IRS) defines as “eligible property”. Eligible property includes the following:
1. Tangible personal property. This includes vehicles, machinery and equipment, furniture and fixtures, property contained in or attached to a building, provided it is not a structural component, storage tanks and pumps, and livestock.
2. Certain other types of tangible property, other than buildings or their structural components, that are used in:
a. Manufacturing, production, or extraction, or furnishing transportation, communications, electricity, gas, water, or sewage disposal services.
b. Research facilities.
c. Facilities used for the bulk storage of fungible commodities.
3. Single-purpose agricultural (livestock) or horticultural structures. Agricultural structures include buildings and enclosures for housing, raising and feeding livestock, including poultry, and to house the related equipment. Horticultural structures include greenhouses, and structures for the commercial production of mushrooms. The single-purpose rule means that the structure can only be used for the purpose that qualifies it for the Section 179 deduction. If the structure is converted to another use, it will no longer qualify.
4. Storage facilities used in connection with the distribution of petroleum or a primary petroleum product, other than buildings or structural components.
5. Off-the-shelf computer software. This is software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been modified.
The property must be acquired for use in your trade or business. Investment property, or property that produces royalties, does not qualify for the Section 179 deduction. Nor does rental property, if you are not in the trade or business of renting out property.
You can claim the Section 179 deduction for eligible property that is used partially in your trade or business, and partially for personal purposes, provided you use the property more than 50% for business the year you place it in service. In this case, the amount of the deduction you can claim is the cost of the property times the percentage of business use.
The property must have been acquired by purchase, not by gift or inheritance. There are cases in which, even though the property is purchased, it will not qualify for the Section 179 deduction. For example, if the property is acquired by a member of controlled group from another member of the same group, the purchase will not qualify. Property whose basis is determined either in whole or in part by the basis in the hands of the person from whom the property was acquired will not qualify. This would be the case for gifts and inheritances, and certain types of exchanges, such as like-kind exchanges. And, property acquired from related persons will not qualify for the Section 179 deduction. Related persons for this purpose include an individual’s spouse, ancestors, and lineal descendents. Related persons also include corporations and partnerships, if the individual directly or indirectly owns more than 50% of the value of the outstanding stock, or more than a 50% interest in the partnership’s capital or profits. Corporations and partnerships may also be considered related parties if there is common ownership. Another type of related persons would be granters, fiduciaries, and beneficiaries of the same trust.
Real property, including land and improvements, such as buildings and their components, do not qualify as Section 179 property. And there are other types of property that are specifically excepted under tax law, even if the property meets the conditions described above. This includes:
Ã?· Certain property leased to others by a lessor who is not a corporation. Corporations that lease property can claim the Section 179 deduction. But if you are not a corporation, you can still claim the deduction for property that you manufacture or produce and lease to others. You can also claim the deduction for property you purchase and lease to others if the term of the lease is less than 50% of the property’s class life (number of years of useful life for depreciation purposes), and if the total business deductions you are allowed on the property during the first 12 months are more than 15% of the rental income.
�· Property used predominately to furnish lodging.
�· Air conditioning or heating units.
�· Property used predominately outside the United States.
�· Property used by tax-exempt organizations, by governmental units, or by foreign persons or entities.
Determining the Amount You Can Deduct
The election to take the Section 179 deduction is made on an item-by-item basis. You can claim the deduction on any item of property that qualifies, without having to claim it on all qualifying property.
Generally, you can claim a deduction for the cost of the property, but the deduction is subject to a dollar amount limit and a business income limit. The deduction is determined in Part I of Schedule 4562, Depreciation and Amortization.
If you purchase the property with a trade-in, paying the balance in cash, you can only claim a Section 179 deduction for the amount paid in cash. But your basis in the property you acquire would be the adjusted basis of the property you traded in plus the cash you paid.
Claiming Part of the Cost as a Section 179 Deduction
If you choose to take the Section 179 deduction, you can claim this deduction for part of the cost, and take a special depreciation allowance and MACRS depreciation on the balance. In this case, the amount subject to the special depreciation allowance would be the cost less the Section 179 deduction, and the amount to be depreciated under MACRS would be the cost less the Section 179 deduction and the special depreciation allowance.
Dollar Limit
There is a maximum amount that can be claimed as a Section 179 deduction each year. This amount is indicated on line 1 in Part I of Schedule 4562. If you have more than one item of property that qualifies for the deduction, you can allocate the deduction among the individual items in any way you choose, provided the total amount is not more than the maximum. And, you do not have to claim the full amount.
There is also a threshold on the cost of the property qualifying for the Section 179 deduction. If the cost of the property is over that threshold, the dollar limit mentioned above must be reduced by the amount by which the cost of the property exceeds the threshold. This threshold amount is indicated on line 3 in Part I of Schedule 4562.
Limit on SUVs and Certain Other Vehicles
The Section 179 deduction you can claim for sport utility vehicles (SUVs) and certain other vehicles is limited to $25,000. This limit applies on vehicles with a gross vehicle weight of from 6,000 to 14,000 pounds, that are primarily designed or used for carrying passengers. Vehicle with a gross vehicle weight of 6,000 pounds or less are subject to the passenger vehicle limits. These limits are explained in chapter 5 of IRS Publication 946, How To Depreciate Property.
Business Income Limit
After you apply the dollar limit, the amount you can claim as a Section 179 deduction is limited to your taxable income from the active conduct of any trade or business during the year. If you actively conduct more than one trade or business during the year, the limit applies on the taxable income from all your trades or businesses. Taxable income for purposes of this limitation is before the Section 179 deduction, and without taking into account the self-employment tax deduction, any net operating loss carryback or carryforward, and any unreimbursed employee business expenses.
Carryover
Any portion of the cost that cannot be deducted in the current year, because of the limitation, can be carried forward and deducted in the following year. The amount you carry over is reported on line 13 in Part I of Schedule 4562 for the current year, and is shown as a deduction the following year on line 10 of the same schedule.
If your carryover amount corresponds to more than one item of property, you will need to keep track of the individual amounts being carried forward. And if the carryover amount corresponds to costs from more than one year, and you cannot claim the total amount in one future year, you must deduct the costs from the earliest year first.
If you sell or dispose of the property before you can use the entire carryover amount from the disallowed deduction, neither you nor the new owner can claim the unused carryover amount as a deduction in the year of the sale or disposal. Instead, this unused carryover must be added to the basis of the property.
Recapturing the Deduction
In order to qualify for the Section 179 deduction, the property must be used more than 50% for business the year you place the property in service. If your business use of the property subsequently drops below 50%, you will have to recapture the deduction. This means that you will have to include a portion of the deduction as ordinary income on your tax return for that year. And you will have to increase the property’s basis by the recapture amount.
The amount you have to recapture is the difference between the Section 179 deduction you claimed, and the depreciation that would have been allowable on the amount you claimed as a deduction, if you had depreciated this amount instead.
The recapture amount is reported in Part IV of Schedule 4797, Sales of Business Property.
