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Is This Deductible?
Explaining IRS Section 179

Internal 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.

The 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 calculate depreciation).

Section 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.

If you 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.

Eligible property includes:

  • machinery and equipment
  • furniture and fixtures
  • most storage facilities
  • single purpose agricultural or horticultural structures
  • livestock
  • listed property (includes certain heavy automobiles, computers, cell phones, etc.)

There 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.

For 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.

The 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.

To 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)
  • An 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).

If 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.

Any election made under Section 179 may not be revoked, modified, or changed without consent from the IRS.

The 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 only.

There are other limitations:

  • Restrictions are placed on first-year deduction for passenger automobiles
  • Section 179 applies only to property used in a trade or business, not investment property
  • Property must be used more than fifty percent for business purposes and only the business use portion can be deducted
  • Only applies to tangible personal property, not real estate
  • You cannot deduct more than you made from all trade and business activities
  • Does not apply to property purchased from a related party
  • Heating and air conditioning units do not qualify

Be 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".



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