Understanding The Section 179 Depreciation Deduction
When a business acquires a depreciable asset (capital assets that have a life expectancy of more than one year) the business is required to depreciate that asset over its useful life. Depreciation rules used to be very simple. The business would receive an annual depreciation deduction equal to the cost of the depreciable property acquired divided by its useful life. Then the idea of accelerated depreciation entered the heads of some Congressmen (or rather the lobbyists) and over time, the rules on depreciating property have become one of the most complicated areas in taxation. One accelerated depreciation method added way back in 1958 created what is now called Section 179 Depreciation. This article will address the current rules that are in effect for depreciating property under Section 179.
General Rules:Rather than having to depreciate property over several years, Section 179 allows businesses to deduct the entire cost of the property in the year of acquisition. In order to qualify, the property must be used more than 50% in a trade or business and must have been acquired from an unrelated third party. The election to depreciate property under Section 179 is made on a property by property basis by completing Part I of Form 4562. There is currently a $500,000 dollar limit on the cumulative amount of the Section 179 deduction a business may take in one year. This maximum deduction is reduced dollar for dollar when the total cost of depreciable property acquired in a given year exceeds $2,000,000.. For example, if your business acquired depreciable property in a single year totalling $2,500,000 you would not be eligible for any Section 179 deduction.
Property Eligible For Section 179 Depreciation:New or used property is eligible, however, if the property was previously personal use property, it is not eligible. Following is a list of property that is eligible for Section 179 expensing: Airplanes Automobiles/Trucks/Vans (Generic – not altered for specific business/industry needs) – limited to $11,060 for cars and $11,160 for trucks and vans Billboards (if movable) Computers Fences used in farming business Gasoline storage tanks and pumps at retail service stations Helicopters House trailers Livestock Machinery and equipment Office equipment (copiers, typewriters, fax machines) Office furniture and fixtures including file cabinets and book shelves Off-the shelf computer software Oil and gas well and drilling equipment Qualified real property Signs (if movable) Certain storage facilities Store counters Testing equipment Tractors Water wells that provide water for livestock
Property Ineligible For Section 179 Depreciation:Any property used 50% or less for business purposes will not qualify. Also any property used in rental house or apartment is not allowed. Property used outside the United States is not eligible. Property used by tax-exempt organizations and governmental units is not eligible. Property held in an estate or trust is never eligible.
Air conditioning units Barns Billboards/Signs (if not movable) Bridges Buildings (Exception if Qualified Real Property) Car washes docks Elevators (Exception if Qualified Real Property) Sidewalks Stables Swimming pools Tailers (if non movable) Warehouses Wharves
I wish to thank the 22 year old Congressional staff members who write the tax code and regulations, the IRS for their incomprehensible explanations thereof and the tax court rulings for making the U.S. income tax system as complex as it is, thus affording me and many other CPAs the opportunity to make a living in a completely unnecessary field.