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Section 179 Depreciation. How Much Can You Deduct?

posted Oct 24, 2013, 9:14 PM by Zaher Fallahi

Your section 179 expense 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 Limits , later. See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later.

 

If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct.

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

 

Partial business use.   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for 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 expense 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 expense 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 expense deduction is the cash you paid. It does not include the adjusted basis of the old tractor you trade for the new tractor.

 

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 allowance 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 $35,000. They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck.

Only the cash paid by J-Bar qualifies for the section 179 expense deduction. J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000).

 

Dollar Limits

The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000.

Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. You do not have to claim the full $500,000. For specific information on the section 179 dollar limits, see chapter 2 of Publication 946.

 

Reduced dollar limit for cost exceeding $2 million.   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000.

 

Example.

This year, James Smith placed in service machinery costing $2,050,000. Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000).

 

Limits for sport utility vehicles.   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight.

  For more information, see chapter 2 of Publication 946.

 

Limits for passenger automobiles.   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. See Do the Passenger Automobile Limits Apply , later.

 

Married individuals.   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. 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. If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. You must allocate the dollar limit (after any reduction) equally between you, 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 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 $2 million).

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.   In general, 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 includes the following items.

Section 1231 gains (or losses) as discussed in chapter 9.

 

Interest from working capital of your trade or business.

Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer.

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

 

The section 179 expense 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 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. If so, complete the following steps.

Step

Action

1

Figure taxable income without the section 179 expense deduction or the other deduction.

2

Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1.

3

Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1.

4

Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income.

5

Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  
Step 1.

6

Figure your actual section 179 expense deduction using the taxable income figured in Step 5.

7

Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1.

8

Figure your actual other deduction using the taxable income figured in Step 7.

Example.

On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. It elects to expense the entire $500,000 cost under section 179. In June, the corporation gave a charitable contribution of $10,000. A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows.

Step 1. Taxable income figured without either deduction is $520,000.

Step 2. Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000.

Step 3. $20,000 ($520,000 − $500,000).

Step 4. Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000.

Step 5. $518,000 ($520,000 − $2,000).

Step 6. Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction.

Step 7. $20,000 ($520,000 − $500,000).

Step 8. Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000.

Carryover of disallowed deduction.   You can carry over for an unlimited number of years 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 expense 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 and elected to deduct all $8,000 under section 179. The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Her section 179 expense deduction was limited to $6,000. The $2,000 cost that was not allowed as a section 179 expense 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 expense 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.

 

Partnerships and S Corporations

The section 179 expense 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 expense 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 $560,000, 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.

 

Example.

In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners.

 

John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. John's taxable income from that business was $10,000. In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014.

 

For assistance with any tax matters, including 2013 Section 179, you may contact Zaher Fallahi, CPA, at (310) 719-1040 (Los Angeles) or (714) 546-4272 (Orange County), or e-mail to taxattorney@zfcpa.com.

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