IRS Deduction Limits
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Section 179 Deduction
Update to this article: The $500,000 is subject to a phase-out beginning at $2 million of section 179 eligible property placed into service in that tax year. Rev. Proc. 2016-55 increases the 2017 expensing amount to $510,000 with a phase-out beginning at $2,030,000 of section 179 property placed into service in the tax year.
What is the Section 179 Deduction?
Most people think the Section 179 deduction is some mysterious or complicated tax code. It really isn't, as you will see below.
Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
Several years ago, Section 179 was often referred to as the "SUV Tax Loophole" or the "Hummer Deduction" because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV's and Hummers). But, that particular benefit of Section 179 has been severely reduced in recent years, see 'Vehicles & Section 179' for current limits on business vehicles.
Today, Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps small businesses. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses - and millions of small businesses are actually taking action and getting real benefits.
Essentially, Section 179 works like this:
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it's true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting over the next few years. That's the whole purpose behind Section 179 - to motivate the American economy (and your business) to move in a positive direction. For most small businesses, the entire cost can be written-off on the 2015 tax return (up to $25,000).
Limits of Section 179
Section 179 does come with limits - there are caps to the total amount written off ($25,000 for 2015), and limits to the total amount of the equipment purchased ($200,000 in 2015). The deduction begins to phase out dollar-for-dollar after $200,000 is spent by a given business, so this makes it a true small and medium-sized business deduction.
Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease less than $200,000 in new or used business equipment during tax year 2015 should qualify for the Section 179 Deduction.
Most tangible goods including "off-the-shelf" software and business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. For basic guidelines on what property is covered under the Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2015 and December 31, 2015.
The deduction begins to phase out if more than $200,000 of equipment is purchased - in fact, the deduction decreases on a dollar for dollar scale after that, making Section 179 a deduction specifically for small and medium-sized businesses.
What's the difference between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn't. Right now in 2015, it's not being offered, but that could change - we'll be the first to tell you when it does.
For purposes of discussion, even though it's not available in 2015, let's explain it anyway.
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only.
Although Bonus Depreciation is not available in 2015 - in years when it is available, Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $200,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
Section 179's "More Than 50 Percent Business-Use" Requirement
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
Past Section 179 Limits and Calculator
Section 179 – IRS Link states:
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 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Estates and trusts cannot elect the section 179 deduction.
Section 179 Calculator (Provided by third party)
by: Stephen Fishman, J.D.
When you own rental property, your best tax deduction is usually depreciation. This permits you to deduct the cost of your rental buildings (not including land) a portion at a time over several years. Unfortunately, depreciation for residential rental property is particularly slow: the depreciation period for residential rentals is 27.5 years. In other words, you'll have to wait 27.5 years to deduct the full cost of your rental buildings.
SECTION 179 EXPENSING
Wouldn't it be great if you could speed up your depreciation deductions? Well, you can deduct the cost some of the property you use in your rental business much more quickly than 27.5 years. In fact, you may be able to deduct the cost in a single year using a provision of the tax law called Section 179.
Under Section 179, business owners can deduct the entire cost of long-term personal property that they use in their business, rather than having to depreciate the cost over several years. This is called first-year expensing or Section 179 expensing.
WHAT PROPERTY CAN BE DEDUCTED UNDER SECTION 179
A business can use Section 179 to deduct tangible, long-term personal property. However, Section 179 specifically excludes personal property used in residential rental property. This means that landlords can’t use Section 179 to deduct the cost of items they purchase for use inside rental units—for example, kitchen appliances, carpets, drapes, or blinds. The only exception is for property in hotels, motels, or vacation homes where the guests stay less than 30 days.
In addition, you can’t use Section 179 to deduct the cost of:
· land improvements, including swimming pools, paved parking areas, and fences
· permanent structures attached to land, including buildings and their structural components, fences, swimming pools, or paved parking areas
· property used outside the United States, or
· air conditioning and heating units.
This restrictions eliminate from Section 179's reach most of the property you buy for your rental business. However, there is still one important property category you can deduct under Section 179: Personal property you use in your rental business that is not located inside your rental buildings. This can include:
· telephones and cell phones
· office equipment
· office furniture you use in your office or other place of business
· cars and other vehicles
· software, and
· maintenance equipment such as lawnmowers.
For example, if you spend $1,000 for office furniture for the office you use in your rental business, you may deduct the entire amount in a single year using Section 179.
MAKE SURE YOUR RENTAL ACTIVITIES QUALIFY AS A BUSINESS
Section 179 can only be used if your rental activities qualify as a business for tax purposes. You can’t use it if your rental activity is an investment, not a business. Thus, make sure you’re a business before you even think about using Section 179. Owning rental property qualifies as a business if you do it to earn a profit and work at it regularly, systematically, and continuously. Rental ownership, on the other hand, is an investment, not a business, if you do it to earn a profit, but don’t work at it regularly, systematically, and continuously—either by yourself or with the help of a manager, agent, or others.
OTHER RESTRICTIONS OF SECTION 179 EXPENSING
Section 179 expensing may be used only for used or new property that you purchase for cash during that year (cash includes amounts you borrow). It may not be used for leased property or property you inherit or are given. Nor may it be used for property you buy from a relative, or from a corporation or other organization you control.
If you use property both for business and personal purposes, you may deduct it under Section 179 only if you use it for business purposes more than half of the time. Reduce the amount of your deduction by the percentage of personal use. You’ll need to keep records showing your business use of such property. If you use an item for business less than half the time, you must depreciate it.
ANNUAL DEDUCTION LIMIT UNDER SECTION 179
There is a limit on the total amount of business property expenses you can deduct each year using Section 179. The limit was originally $25,000 but was dramatically increased in recent years to help a struggling economy. For 2014, 2013, and 2012, the Section 179 limit was increased to $500,000. The $500,000 Section 179 limit expires at the end of 2014 and is scheduled to go back to a $25,000 investment limit with a $200,000 income limit unless Congress acts to extend it again as it has in recent years.
This dollar limit applies to all your businesses together, not to each business you own and run. You do not have to claim the full amount. It’s up to you to decide how much of the cost of property you want to deduct. But you don’t lose out on the remainder; you can depreciate any cost you do not deduct under Section 179.
If you purchase more than one item of Section 179 property during the year, you can divide the deduction among all the items in any way, as long as the total deduction is not more than the Section 179 limit. It’s usually best to apply Section 179 to property that has the longest useful life and therefore the longest depreciation period. This reduces the total time you have to wait to get your deductions.
MINIMUM PERIOD OF BUSINESS USE
When you deduct an asset under Section 179, you must continue to use it for business at least 50% of the time for as many years as it would have been depreciated. For example, if you use Section 179 for a computer, you must use it for business at least 50% of the time for five years, because computers have a five-year depreciation period.
If you don’t meet these rules, you’ll have to report as income part of the deduction you took under Section 179 in the prior year. This is called recapture--something you want to avoid.Type your paragraph here.