Code Section 179 Expense Election
Generally, the cost of property placed in service in a trade or business
can't be deducted in the year it's placed in service if the property will be useful beyond
the year. The cost is “capitalized” and depreciation deductions are allowed for the
property, but are spread out over a period of years (a “cost recovery period”).
Capitalization delays the tax benefits of business expenditures. For example, you may
spend $50,000 on a new computer system today, but must spread your depreciation deductions
over a five-year period. That's why the election to take immediate deductions is
The expense election is made available, on a tax year by tax year basis, under Section 179
of the Internal Revenue Code (the “Code”), and is often referred to as the “Section
179 election” or the “Code Section 179 election.”
Subject to a dollar limit, the election allows you to deduct, in the tax year for which
the election is made, the cost of qualifying property (described below) placed in service
during the tax year. The deductions allowed are in lieu of depreciation deductions. For
tax years beginning in 2007, the dollar limit is $125,000 (up from $108,000 in 2006).
Based on the rate of inflation, the limit may be raised higher in 2008, 2009, and 2010.
However, for tax years beginning after 2010 (i.e., 2011 and later) the dollar limit is
scheduled to drop to $25,000. (As discussed below, the dollar limit is reduced, i.e., made
more stringent, if more than $500,000 of qualifying property is placed in service during
the 2007 tax year ($430,000 for tax year 2006), or if taxable income from your trade or
business is low for the tax year. On the other hand, higher limits apply to certain
property used in a qualified business in designated geographic areas, such as the DC Zone,
the New York Liberty Zone, and the Gulf Opportunity Zone.)
Qualifying property. To qualify for the election, the property must be
“tangible personal” property. This means that real estate (land, buildings, and their
structural components) does not qualify, nor do intangibles such as patent rights.
However, for tax years beginning before Jan. 1, 2011, off-the-shelf computer software
qualifies. Also, to qualify, property must be “purchased.” Thus, if you acquired the
property in a tax-free exchange or from an individual or entity to which you bear a close
relationship specified in the Code, the property does not qualify.
Dollar limit. The dollar limit doesn't mean the election can't be made
for property costing more than that amount. For example, if you buy a machine for $133,000
and place it in service in a business in a tax year beginning in 2007, you can elect to
deduct $125,000 of its cost for that year. The remainder ($8,000) is capitalized and
depreciated. Also, you can make the election for two or more separate assets as long as
the total cost covered by the election doesn't exceed the dollar limit for that year.
You should be aware, regarding the dollar limit, that if the total cost of qualifying
property that you place in service during a tax year beginning in 2007 is over $500,000
(the “phaseout” amount), the dollar limit is reduced by that extra amount. For
example, if you place in service $520,000 of qualifying property in a tax year beginning
in 2007, you can make the election for no more than $105,000 of property ($125,000 minus
the $20,000 excess over $500,000). For tax years beginning in 2006, the phaseout began at
$430,000. Based on the rate of inflation, the phaseout amount may be raised higher in
2008, 2009, or 2010. For tax years beginning after 2010, the phaseout amount is scheduled
to drop to $200,000.
You might consider postponing, to later tax years, or accelerating, into earlier tax
years, placing property into service, to take best advantage of the dollar limits (as
further limited by the phaseout rule). For example, if you have ordered two items of
qualifying property costing $125,000 each, you might want to consider placing only one of
them in service in 2007. Doing so will permit you to elect to expense $125,000 in 2007 and
$125,000 in 2008 (when the inflation-adjusted amount will be at least $125,000). If both
are placed in service in 2007, your expense election for the two items is limited to one
Taxable income limit. If your taxable income from all of your trades or
businesses is less than the dollar limit for that year, the amount for which you can make
the election is limited to that taxable income. However, any amount you can't currently
deduct because of the taxable income limitation is carried forward and may be deducted in
later years (to the extent that the applicable dollar limit, the phaseout rule and the
taxable income limit permit).
Recapture. If you dispose of the property, or stop using it in a trade or
business, before the end of the cost recovery period that would have applied to the
property had you not made the election for the property, all or part of the amount of the
deduction you claimed under the election must be taken back into income
(“recaptured”). Exactly how much will depend on the type of property and how long you
used the property in a trade or business.
The above information covers the essential elements of the Code Section
179 election. Clearly, many considerations go into each decision to acquire business
assets, and most involve non-tax factors. However, the election should play a role;
accelerated tax benefits may enable you to obtain the property you need earlier and at
reduced after-tax costs.