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 cost of the property to be capitalized and depreciated. This property is generally limited to tangible, depreciable, personal property which is acquired by purchase for use in the active conduct of a trade or business.[1] Buildings were not eligible for section 179 deductions prior to the passage of the Small Business Jobs Act of 2010; however, qualified real property may be deducted now.[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 optional, and the eligible property may be depreciated according to sections 167 and 168 if preferable for tax reasons.[3] Further, the 179 election may be made only for the year the equipment is placed in use and is waived if not taken for that year.[4] However, if the election is made, it is irrevocable unless special permission is given.[5]
For regular depreciation deductions in the United States, see MACRS.
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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 $500,000.[7] It is scheduled to stay at this amount for tax years beginning in 2010 and 2011.
Second, § 179(b)(2) requires taxpayers, if they place more than $2,000,000 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 $2,000,000 threshold.[8]
Finally, § 179(b)(3) provides that a taxpayer's § 179 deduction for any taxable year may not exceed the taxpayer's aggregate income from the active conduct of trade or business by the taxpayer for that year.[9] If, for example, the taxpayer's net trade or business income from active conduct of trade or business was $72,500 in 2006, then the taxpayer's § 179 deduction cannot exceed $72,500 for 2006. However, the § 179 deduction not allowed for any year because of this limitation can be carried over to the next year.[10]
Up to $25,000 of the cost of vehicles rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight can be deducted using a section 179 deduction.[11] 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 after-tax 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 almost twice 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[12] 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.
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:
Vehicles over 6,000 lb but not meeting these criteria are limited to a deduction of $25,000.