Tax and Money Tip of the Week:
Tax Depreciation-Section 179
December 13, 2017 | No. 362
As the end of the year draws near, many taxpayers are thinking about tax planning. One of the tax planning strategies often used is the Section 179 deduction (accelerated depreciation).
This deduction allows new or used qualifying property to be expensed in the year of purchase, rather than be depreciated over the life of the asset. The maximum cost of such property under Section 179 that may be expensed in 2017 is $510,000.
There are two primary limitations which may reduce the amount of the Section 179 deduction allowed. The first is related to the total cost of Section 179 property purchased during the year. For every dollar of qualifying property purchased over $2,030,000 in 2017, the Section 179 deduction is reduced by one dollar (but not below zero).
The second limitation is the business income limitation. The business must have taxable income to take any Section 179 deduction, and the deduction cannot be used to create an overall business loss. Form W-2 is considered business income for this calculation. For example, if you are a Schedule C filer, and also have a W-2 from a different source, the W-2 income and the business income or loss is combined for the overall limitation on the taxpayer’s Form 1040. Any Section 179 unused because of the income limitation may be carried forward indefinitely. However, no carryover exists if asset additions exceed the qualifying property threshold. This situation could occur if a taxpayer has Section 179 deductions from multiple pass-through entities.
The expensing election is an annual election, and can only be used on assets placed in service during the current year. The asset must also be used more than 50% in the business. If business use drops below 50% in a future year, any Section 179 depreciation that was taken in the year of purchase must be recaptured (reported as income) in the year business use drops below 50%. Also, please note that assets purchased from a related party do not qualify for the Section 179 expensing election.
Some examples of qualifying property include furniture, machinery and equipment, certain vehicles (within limitations), tractors and single-purpose agricultural structures.
Non-qualifying property includes: land, docks, elevators, landscaping, and swimming pools.
The Section 179 deduction is a great tax planning tool for small to medium-sized businesses. The decision to use this deduction may be made with your tax return simply by claiming the deduction on Form 4562, Depreciation and Amortization. No separate election statement is required. Please keep in mind that your cost basis in the asset(s) will be reduced by the Section 179 deduction and will increase the gain upon a subsequent sale.
Questions or Comments?
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Mark Vitek, CPA/PFS, CFP®
…until next week.