DEPRECIATION & THE 179 ELECTION
Writing Off Equipment and Cars in the Year of Purchase
The first year in which you purchase property for use in a business you may elect to expense, under Internal Revenue Code section 179, all or part of the cost. The property must be "qualified property", meaning it must:
- Be used more than 50% in a trade or business ( if used less than 100% for business, an allocation will need to be made),
- Be tangible property; e.g., machinery, equipment, computers, etc. (buildings and their structural components do not qualify),
- Not have been purchased from a related party, and
- Have been purchased in the year in which the deduction is taken (property purchased in an earlier year and subsequently converted to business use does not qualify).
The maximum amount which you may expense (deduct) under section 179 for the tax year 2007 is $125,000.
The maximum section 179 deduction for a car is $4,800 and $5,200 for a truck or van for the tax year 2007. If you elect to take a section 179 deduction for a car, no other depreciation may be taken for the car that year, as $7,660 is the maximum depreciation deduction for the first year for luxury automobile limits. For vehicles placed in service after
The deduction cannot exceed the lesser of:
- The maximum dollar limit mentioned above, or
- Net taxable income from all actively conducted trades or businesses. Net taxable income for this purpose is the sum of the following:
- Net taxable income from any business in which the taxpayer actively participates (schedule C & F)
- Wages, salaries and tips as an employee (both taxpayer and spouse)
- Section 1231 gains and losses
- Interest from working capital
- Share of active business income/loss from partnerships/S-corps in which the taxpayer actively participates
Note: for certain automobiles weighing in excess of 6,000lbs - the luxury automobile limits may not be applicable. Examples would be heavy trucks, multipurpose sports vehicles, certain vans etc.
Note --- Any amount not taken because of the taxable income limitation is carried forward to the following tax year.
- Purchases of qualified property in excess of $450,000. The section 179 deduction is reduced dollar for dollar by the amount of purchases greater than $450,000.
When & How is the Election Made?
The election to take the section 179 deduction is made in the year the property is purchased and placed in service. The election is made by taking the deduction on form 4562. The election must be made on the original return. An election cannot be made on an amended return UNLESS it is filed by the due date (including extensions) of the original return. The election will be lost if not made on either the original return or the amended return (as discussed).
What are the Advantages of Taking a Section 179 Deduction?
- Reduces taxable income, if your tax liability is high
- Reduces recordkeeping. If property is written off in the first year, there will not be a need to keep track of depreciation over the life of the asset.
Are there Any Disadvantages to taking a Section 179 Deduction?
- Possible recapture of the section 179 deduction if the property is sold or used 50% or less for business in the years following the year placed in service, but prior to the end of the asset's depreciation period. To figure any recapture, the amount that would have been claimed with regular depreciation is subtracted from the section 179 deduction claimed. This amount is treated as ordinary income on form 4797 in the year of recapture.
- If you expect your income to be consistently low enough in the future that you would be subject to the taxable income limitation and forced to carryforward the unused section 179 deduction. In this case, it would be more advantageous to take the regular depreciation.