Sec. 179 Expensing For 2013

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. Instead, the cost is “capitalized” and depreciation deductions are allowed for most property (other than land), but are spread out over a period of years. 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 several years. That’s why the election to take immediate deductions is valuable.

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 immediate deductions allowed are in lieu of later depreciation deductions. The annual deduction limit for tax years beginning in 2013 is $500,000. As discussed below, the deduction is phased out if more than a specified amount of qualifying property is placed in service during the tax year. That amount is $2,000,000 for tax years beginning in 2013.

Qualifying property

To qualify for the election, the property must be “tangible personal” property used in a trade or business, including the following.

• Most furniture, fixtures, machinery, and equipment (but not HVAC equipment).
• Off-the-shelf computer software.
• Up to $250,000 of real property consisting of certain leasehold improvements, retail improvements or restaurant property.
• The property can be new or used when purchased.

This means that real estate (buildings and their structural components) does not qualify, nor do intangibles such as patent rights. Also, to qualify, property must be purchased (this includes financing arrangements). Thus, if, for example, you acquired the property in a tax-free exchange, by gift or inheritance, or from an individual or entity to which you bear a close relationship specified in the Code, the property does not qualify. Property used in a rental activity generally does not qualify.

Dollar limit

The limit for the deduction in 2013 is $500,000. 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 $600,000 in a tax year beginning in 2013, you can elect to immediately deduct $500,000 of its cost for that year (subject to the taxable income limit discussed below). 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.

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, for most types of property, any amount you can’t immediately deduct because of the taxable income limitation is carried forward and can be deducted in later years (to the extent that the applicable dollar limit, the phaseout rule, and the taxable income limit permit). Also note that wages paid to certain corporate shareholder-employees, or guaranteed payments paid to certain partners in a partnership, are “added back” to net income for this limitation. So, an owner-managed business with low taxable income could still qualify for a significant Section 179 deduction.

What’s ahead

Unless Congress passes extending legislation, the Section 179 maximum deduction is scheduled to drop from $500,000 to just $25,000 for tax years beginning after 2013.

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 many 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.