Explaining IRS Section 179
Revenue Code Section 179 is the part of the tax law designed
to allow small businesses to deduct the cost of business
furniture, equipment and the like the year the items are
put into use. Past Tax Court rulings emphasize the need
to be extremely careful in the application of Section 179
and the classification of assets.
total cost of property that has a long, useful life cannot
usually be deducted in the year the property is acquired.
Instead, the deductions are spread out over the entire recovery
period (the specified length of time by the IRS used to
179 provides an opportunity for most small businesses to
avoid the depreciation requirement by allowing a deduction
of up to $24,000 in 2002 and up to $25,000 in 2003. A business
benefits from Section 179 because they take deductions earlier
rather than later. Through the election of Section 179,
businesses pay less tax in the year the property is purchased.
Section 179 applies to corporations, partnerships, limited
liability companies and sole proprietorships.
buy assets for your business, you may be able to deduct
up to $24,000 in 2002 and up to $25,000 in 2003 on your
tax return. Section 179 of the IRS Code allows you to expense
the cost of certain assets in the year they were purchased,
instead of depreciating the cost over several years.
purpose agricultural or horticultural structures
property (includes certain heavy automobiles, computers,
cell phones, etc.)
is a limitation on how much you can deduct under Section
179. You cannot deduct more than your taxable income, or
more than the total cost of the property purchased. However,
Section 179 deductions can be carried over into future years.
example: You purchase an asset for $26,000 and put this
asset into use in 2002. You can elect to take a Section
179 deduction of $24,000. The remaining $2,000 will be deducted
in future years over the useful life of the asset.
use of Section 179 is not automatic. The use of this deduction
must be elected in the year property is placed into service.
This is defined as the year that property is first made
ready and available for a specific use. The use can be in
a trade or business, production of income, or a tax-exempt
activity. If property is not used in an activity that qualifies
for a Section 179 deduction, it will not qualify in any
future year, even if you change it to business use.
make the election to use Section 179, you must complete
IRS Form 4562 with either of the following:
- Your original tax return filed for the year the property
was put into service (whether or not it was filed timely)
amended return filed by the due date for your return for
the year the property was placed into service. You cannot
make an Section 179 election on an amended return filed
after the due date (including extensions).
you timely filed your return for the year without making
the election, you have only six months from the due date
to file an amended return.
election made under Section 179 may not be revoked, modified,
or changed without consent from the IRS.
maximum dollar deduction is reduced by a dollar for each
dollar spent on Section 179 property over $200,000 each
year. (i.e. a business spending over $224,000 in 2002 or
$225,000 in 2003 does not qualify for the Section 179 deduction.)
The tax break from Section 179 is for small-business use
are other limitations:
are placed on first-year deduction for passenger automobiles
179 applies only to property used in a trade or business,
not investment property
must be used more than fifty percent for business purposes
and only the business use portion can be deducted
applies to tangible personal property, not real estate
cannot deduct more than you made from all trade and business
not apply to property purchased from a related party
and air conditioning units do not qualify
very cautious in your characterization of those assets that
might be considered to have a long, useful life and might
be subject to depreciation. Supplies and materials are generally
used up within a year, whereas depreciable assets are tangible
assets that have a useful life of more than one year. If
you have room under the cap of Section 179, use it for those
questionable assets rather than simply classifying them
as "materials and supplies".