Code Sec. 179 is a provision aimed at assisting small businesses that allows taxpayers to expense the cost of qualified property instead of capitalizing the cost and recovering it over a period of years.
For 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 is restricted to the business’ yearly income. However, disallowed amounts due to the restriction can be carried over to a future year.
Although there is an overall cap on the amount that can be written off, there is no cap that can be written off on a particular piece of property under Code Sec. 179. Therefore, if property placed in service in 2013 cost $200,000, a taxpayer can take bonus depreciation for 50 percent of the cost (or $100,000), but can expense the entire $200,000 under Code Sec. 179 as long as it is not restricted due to the income from the business.
Qualifying property is defined as tangible property that can be depreciated under Code Sec. 168 or off-the-shelf computer software placed in service before 2014. This includes tangible personal property and property used in manufacturing, extraction and production activities. The property can be new or used but must be acquired for use in the active conduct of the business.
Currently, qualifying property also includes “qualified real property.” Qualified leasehold improvements, qualified retail improvement property, and qualified restaurant improvement property are all considered “qualified real property” and therefore are included.
An election to claim the Code Sec. 179 deduction must be made each year the taxpayer is planning on using the deduction. Property can only be expensed in the tax year it is placed in service, not the year it is purchased or obtained. When making the election, the total amount of the deduction and the portion of the deduction allocable to each item of property must be provided by the taxpayer.
Usually, the election must be made by the due date of the return filed for the year in which the property is placed in service. This election is binding unless the IRS allows for it to be revoked. However, for property placed in service in 2003-2013, the taxpayer may amend a prior year return and make an election (or a revocation) as long as the amended return is filed within the limitations period. A revocation, once made on an amended return, is permanent.
The enhanced Code Sec. 179 expensing is set to expire at the end of 2013 unless Congress extends votes to extend it. If the provision is not extended, the $500,000 cap is reduced to $25,000 for property placed in service in 2014 and beyond. The $2 million phase-out limitation is set to be reduced to $200,000 for tax years beginning in 2014. For more information on taking advantage of Code Sec. 179 expensing, please contact us at 417-881-0145.