Section 179 depreciation deduction

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Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes, as an expense (rather than requiring the property to be capitalized and depreciated). This property is generally limited to tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.^[1] Buildings are not eligible for section 179 deductions.^[2] Depreciable property that is not eligible for a section 179 deduction is still deductible over a number of years through MACRS depreciation according to sections 167 and 168. The 179 election is NOT mandatory, and the equipment may be depreciated according to sections 167 and 168 if preferable for tax reasons.^[3] Further, the 179 election may only be taken in the year the equipment is placed in use and is waived if not taken in that year.^[4] However, if the election is taken, it is irrevocable unless special permission is given.^[5]

1 Limitations
2 Large vehicles
- 2.1 2004 vehicle limits
3 References

[edit] Limitations

The § 179 election is subject to three important limitations.^[6]

First, there is a dollar limitation. Under section 179(b)(1), the maximum deduction a taxpayer may elect to take in a year is currently (2008) $250,000. For the 2007 Tax year, $125,000. Recently upgraded by President Bush's signing of the Economic Stimulus Package. However, this is set to revert to $25,000 after 2010.

Second, § 179(b)(1) requires taxpayers who place more than $500,000 worth of section 179 property into service during a single taxable year to reduce, dollar for dollar, their 179 deduction by the amount exceeding the $500,000 threshold.^[7] For example, if a taxpayer put $550,000 worth of 179 property into service during 2006, then he or she would be required to reduce his or her 179 deduction by $50,000 ($550,000-$500,000=$50,000) so that his or her 179 deduction could be no greater than $75,000 ($125,000 - $50,000 = $75,000). Again, this limit is also set to revert after 2010 to $200,000.

Finally, § 179(b) provides that the 179 deduction in any given year may not exceed the taxpayer's total taxable income in that year.^[8] If, for example, the taxpayer's taxable income was $75,000 in 2006, then his or her 179 deduction could not exceed $75,000. However, the 179 deduction not taken can be carried over.^[9]

[edit] Large vehicles

Up to $25,000 of the cost of vehicles rated at not less than 14,000 lb gross vehicle rate can be deducted using a section 179 deduction.^[10] This deduction was enacted decades ago to assist self-employed people in purchasing a vehicle for business use. The weight minimum was intended to limit it to commercial-type trucks. For many years, the deduction remained below the average cost of a new vehicle, since large trucks were relatively inexpensive. Since it is a reduction in taxable income, the actual value of this deduction averages 30% of the price of the vehicle in question.

The increasing popularity of large vehicles such as sport utility vehicles in the last decade, however, pushed their average price to nearly double the average passenger car cost. In response, the 2002 Tax Act increased this deduction to $75,000, and it rose again to $100,000 for the 2003 tax year. This was more than three times the current average cost of a passenger car in the United States, and covered a large number of luxury models.

Critics felt that this deduction unfairly benefit buyers of heavy, and thus fuel-inefficient, vehicles. Indeed, the actual value of this deduction is far larger than the exemptions offered for alternative fuel vehicle purchasers. Further, some have suggested creating a small business simply to exploit this "loophole". Proponents contend that it benefits both small business owners and the United States automobile industry. Congress has since lowered the allowable deduction: as of October 22, 2004, only $25,000 may be deducted using section 179. In contrast, the maximum first year deduction for a passenger automobile is $10,610. Any excess cost may be deducted in future years.

[edit] 2004 vehicle limits

During 2004, the deduction stands at $102,000 but was severely limited as of October 22 of that year. After this date, it applies only to vehicles meeting one or more of the following criteria:

A gross weight of more than 14000 lb (6350 kg)
Seating more than 9 passengers behind the driver's seat
Equipped with an open cargo box of at least 6 ft (1.8 m)
Equipped with a closed cargo box not accessible from the interior
Has a fully enclosed driver compartment and load carrying device, does not have seating rearward

of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield

Vehicles over 6000 lb but not meeting these criteria are limited to a deduction of $25,000.

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