You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 expense deduction. You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions.
This part of the chapter explains the rules for the section 179 expense deduction. It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction.
For more information, see chapter 2 of Publication 946.taxmap/pubs/p225-030.htm#en_us_publink100079205
To qualify for the section 179 expense deduction, your property must meet all the following requirements.
- It must be eligible property.
- It must be acquired for business use.
- It must have been acquired by purchase.
To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property.
- Tangible personal property.
- Other tangible property (except buildings and their structural components) used as:
- An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services;
- A research facility used in connection with any of the activities in (a) above; or
- A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
- Single purpose agricultural (livestock) or horticultural structures.
- Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
- Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified.
Tangible personal property is any tangible property that is not real property. It includes the following property.
- Machinery and equipment.
- Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment.
- Gasoline storage tanks and pumps at retail service stations.
- Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals.
A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (2)(a). Bulk storage means the storage of a commodity in a large mass before it is used.taxmap/pubs/p225-030.htm#en_us_publink100079209
A grain bin is an example of a storage facility that is qualifying section 179 property. It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities.taxmap/pubs/p225-030.htm#en_us_publink100079210
A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction.taxmap/pubs/p225-030.htm#en_us_publink100079211
A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons.
- To house, raise, and feed a particular type of livestock and its produce.
- To house the equipment, including any replacements, needed to house, raise, or feed the livestock.
For this purpose, livestock includes poultry.
Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock.taxmap/pubs/p225-030.htm#en_us_publink100079212
A single purpose horticultural structure is either of the following.
- A greenhouse specifically designed, constructed, and used for the commercial production of plants.
- A structure specifically designed, constructed, and used for the commercial production of mushrooms.
A structure must be used only for the purpose that qualified it. For example, a hog barn will not be qualifying property if you use it to house poultry. Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property.
If a structure includes work space, the work space can be used only for the following activities.
- Stocking, caring for, or collecting livestock or plants or their produce.
- Maintaining the enclosure or structure.
- Maintaining or replacing the equipment or stock enclosed or housed in the structure.
To qualify for the section 179 expense deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify. Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase.taxmap/pubs/p225-030.htm#en_us_publink100079215
Ken is a farmer. He purchased two tractors from his father. He placed both tractors in service in the same year he bought them. The tractors do not qualify as section 179 property because Ken and his father are related persons. He cannot claim a section 179 expense deduction for the cost of these machines.taxmap/pubs/p225-030.htm#en_us_publink100079216taxmap/pubs/p225-030.htm#en_us_publink100079217
Land and land improvements, such as buildings and other permanent structures and their components, are real property, not personal property and do not qualify as section 179 property. Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. However, agricultural fences do qualify as section 179 property. Similarly, field drainage tile also qualifies as section 179 property.taxmap/pubs/p225-030.htm#en_us_publink100079218
Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property.
- Certain property you lease to others (if you are a noncorporate lessor).
- Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.
- Air conditioning or heating units.
- Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business.
- Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months).
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.taxmap/pubs/p225-030.htm#en_us_publink100079220
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.taxmap/pubs/p225-030.htm#en_us_publink100079221
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.taxmap/pubs/p225-030.htm#en_us_publink100079222
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 $15,000. They received a $5,000 trade-in allowance and paid $10,000 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 $15,200 ($5,200 + $10,000).taxmap/pubs/p225-030.htm#en_us_publink100079223
The total amount you can elect to deduct under section 179 for most property placed in service in 2008 is $250,000. 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 $250,000. You do not have to claim the full $250,000.taxmap/pubs/p225-030.htm#en_us_publink100079224
This year, you bought and placed in service a corn combine for $305,000 and a mower for $7,800 for use in your farming business. You elect to deduct the entire $7,800 for the mower and $242,200 for the corn combine, a total of $250,000. This is the most you can deduct. Your $7,800 deduction for the mower completely recovered its cost. Your basis for depreciation is zero. The basis of your corn combine for depreciation is $62,800. You figure this by subtracting the amount of your section 179 expense deduction, $242,200, from the cost of the corn combine, $305,000.taxmap/pubs/p225-030.htm#en_us_publink100079225
If the cost of your qualifying section 179 property placed in service in 2008 is over $800,000, you must reduce the dollar limit (but not below zero) by the amount of cost over $800,000. If the cost of your section 179 property placed in service during 2008 is $1,050,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $1,050,000. taxmap/pubs/p225-030.htm#en_us_publink100079226
This year, James Smith placed in service machinery costing $850,000. Because this cost is $50,000 more than $800,000, he must reduce his dollar limit to $200,000 ($250,000 − $50,000).taxmap/pubs/p225-030.htm#en_us_publink100079227
If you placed in service certain qualified section 179 GO Zone property (described below) of which substantially all of the use is in one or more specified portions of the GO Zone (as defined in section 1400N(d)(6) of the Internal Revenue Code), you may be able to take an increased section 179 expense deduction. In 2008, the amount of property for which you can make the election under section 179 is increased by the smaller of:
- $100,000 or
- The cost of qualified section 179 GO Zone property placed in service before January 1, 2009 (including such property placed in service by your spouse, even if you are filing a separate return).
The amount for which you can make the election is reduced if the cost of all section 179 property placed in service during the year exceeds $800,000 increased by the smaller of:
- $600,000 or
- The cost of qualified section 179 GO Zone property placed in service during the year.
For all other qualified section 179 GO Zone property placed in service during the tax year, the maximum deduction is $250,000.
Qualified section 179 GO Zone property is section 179 property that is also qualified GO Zone property (described later under Claiming the Special Depreciation Allowance).taxmap/pubs/p225-030.htm#en_us_publink100079228
You may be able to take an increased section 179 expense deduction for qualified section 179 Recovery Assistance property placed in service in the Kansas disaster area. For more information, including definitions of qualified section 179 Recovery Assistance property, see Publication 4492-A.
You may be able to take an increased section 179 expense deduction for qualified section 179 disaster assistance property placed in service in federally declared disaster areas during the tax year. A list of the federally declared disaster areas is available at the Federal Emergency Management Agency (FEMA) web site at www.fema.gov
. For more information, including the definition of qualified section 179 disaster assistance property and the eligible disaster areas, see chapter 2 of Publication 946.
The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2008 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. taxmap/pubs/p225-030.htm#en_us_publink100079231
For a passenger automobile that is placed in service in 2008, the total section 179 and depreciation deduction is limited. See Do the Passenger Automobile Limits Apply, later.taxmap/pubs/p225-030.htm#en_us_publink100079232
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 $800,000. 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. taxmap/pubs/p225-030.htm#en_us_publink100079233
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 $800,000).
- The total cost of section 179 property you and your spouse elected to expense on your separate returns.
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.taxmap/pubs/p225-030.htm#en_us_publink100079235
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.
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.
|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 |
|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.|taxmap/pubs/p225-030.htm#en_us_publink100079238
On February 1, 2008, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $250,000. It elects to expense the entire $250,000 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 $270,000. XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows.
- Step 1. Taxable income figured without either deduction is $270,000.
- Step 2. Using $270,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $250,000.
- Step 3. $20,000 ($270,000 − $250,000).
- 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. $268,000 ($270,000 − $2,000).
- Step 6. Using $268,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Because the taxable income is at least $250,000, XYZ can take a $250,000 section 179 expense deduction.
- Step 7. $20,000 ($270,000 − $250,000).
- 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.
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. taxmap/pubs/p225-030.htm#en_us_publink100079239
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.taxmap/pubs/p225-030.htm#en_us_publink100079240
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 $800,000, 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. taxmap/pubs/p225-030.htm#en_us_publink100079241
In 2008, Partnership P placed in service section 179 property with a total cost of $960,000. P must reduce its dollar limit by $160,000 ($960,000 − $800,000). Its maximum section 179 expense deduction is $90,000 ($250,000 − $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 $100,000, it can deduct the full $90,000. P allocates $40,000 of its section 179 expense deduction and $50,000 of its taxable income to John, one of its partners.
John also conducts a business as a sole proprietor and in 2008, 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 $40,000 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 $60,000 ($50,000 from P plus $10,000 from his sole proprietorship). He carries over $8,000 ($68,000 − $60,000) of the elected section 179 costs to 2009.taxmap/pubs/p225-030.htm#en_us_publink100079242
You elect to take the section 179 expense deduction by completing Part I of Form 4562.
If you elect the deduction for listed property, complete Part V of
Form 4562 before completing Part I.
File Form 4562 with either of the following:
- Your original tax return (whether or not you filed it timely), or
- An amended return filed within the time prescribed by law. An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. The amended return must also include any resulting adjustments to taxable income.
An election (or any specification made in the election) to take a section 179 expense deduction for 2008 can be revoked without IRS approval by filing an amended return. The amended return must be filed within the time prescribed by law. The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains.) Once made, the revocation is irrevocable.taxmap/pubs/p225-030.htm#en_us_publink100079245
You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. You also increase the basis of the property by the recapture amount. Recovery periods for property are discussed later.
If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Instead, use the rules for recapturing depreciation explained in chapter 9 under Section 1245 Property.
If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation.
To figure the amount to recapture, take the following steps.
- Figure the allowable depreciation for the section 179 expense deduction you claimed. Begin with the year you placed the property in service and include the year of recapture.
- Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. The result is the amount you must recapture.
In January 2006, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. The property is not listed property. He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. He used the property only for business in 2006 and 2007. During 2008, he used the property 40% for business and 60% for personal use. He figures his recapture amount as follows.
|Section 179 expense deduction claimed (2006)||$5,000|
|Minus: Allowable depreciation|
(instead of section 179 expense deduction):
|2007|| 1,875|| |
|2008 ($1,250 × 40% (business))||500||3,625|
|2008 — Recapture amount||$1,375|
| || |
Paul must include $1,375 in income for 2008.taxmap/pubs/p225-030.htm#en_us_publink100079250
Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). taxmap/pubs/p225-030.htm#en_us_publink100079251
If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as "other income."