Code Sec. 179 allows taxpayers to expense the cost of qualified property instead of capitalizing the cost and recovering it over a period of years. The provision is designed to help small business. For the period 2010-2013, taxpayers can write off up to $500,000 of the costs of qualified property placed in service during the year. The $500,000 cap is reduced dollar-for-dollar to the extent that the cost of qualified property placed in service during the year exceeds $2 million. The amount claimed cannot exceed the income from the taxpayer’s trade or business for the year. Any amount disallowed can be carried over to a future year.
The enhanced Code Sec. 179 expensing will expire at the end of 2013 unless Congress extends it. The $500,000 cap decreases to $25,000 for property placed in service in tax years beginning after 2013. The $2 million phase-out limitation is scheduled to decrease to $200,000 for tax years beginning after 2013.
Although there is an overall cap on the amount that a taxpayer can write off under Code Sec. 179, there is no cap on the amount that can be written off on a particular piece of property. Thus, if property placed in service in 2013 cost $100,000, a taxpayer can take bonus depreciation for 50 percent of the cost (or $50,000), but can expense the entire $100,000 under Code Sec. 179. There is a $25,000 cap on write-offs for sport utility vehicles.
Qualifying property is tangible property that is depreciable under Code Sec. 168 (the Modified Accelerated Cost Recovery System, or MACRS), or off-the-shelf computer software placed in service before 2014. The property must be Code Sec. 1245 property. This includes tangible personal property and property used in manufacturing, extraction and production activities. The property must be acquired for use in the active conduct of a trade or business. The property can be new or used.
For tax years 2010-2013, qualifying property also includes “qualified real property.” This encompasses qualified leasehold improvements, qualified retail improvement property, and qualified restaurant improvement property.
Taxpayers must make the election to claim the Code Sec. 179 deduction on Form 4562, Depreciation and Amortization. Taxpayers must make a new election each year. Property can be expensed in the year it is placed in service, not the year it is obtained. The election must provide the total amount of the deduction and the portion of the deduction allocable to each item of property.
Ordinarily, the election must be made by the due date of the return filed for the year in which the property is placed in service. The election is irrevocable unless the IRS consents to revocation. However, for property placed in service in 2003-2013, the taxpayer may make an election (or a revocation) on an amended return filed within the limitations period for an amended return. A revocation, once made on an amended return, is irrevocable.
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