Section 179 Deduction This part of the chapter explains the rules for the section 179deduction. It explains what a section 179 deduction is, the costs thatcan be deducted, what property qualifies for the deduction, limitsthat may apply, and how to claim the deduction. You can recoverthrough depreciation certain costs that you do not recover through thesection 179 deduction. Section 179 Deduction Defined Section 179 of the Internal Revenue Code allows you to elect todeduct all or part of the cost of certain qualifying property in theyear you place it in service. You can do this instead of recoveringthe cost by taking depreciation deductions. What Costs Can andCannot Be Deducted You can claim the section 179 deduction for the cost of qualifyingproperty acquired for use in your trade or business. You cannot claimthe deduction for the cost of property you hold only for theproduction of income. For information on property held for the production of income, seeProduction of income, later. Acquired by Purchase Only the cost of property you acquired by purchase for use in yourbusiness qualifies for the section 179 deduction. The cost of propertyacquired from a related person or group may not qualify. SeeNonqualifying Property, later. Acquired by Trade If you buy an asset with cash and a trade-in, you can claim asection 179 deduction based only on the amount of cash you pay. Forexample, if you buy (for cash and a trade-in) a new tractor for use inyour business, your cost for the section 179 deduction does notinclude the adjusted basis of the old tractor you trade for the newtractor. See Adjusted Basis in chapter 7. Example.J-Bar Farms traded two cultivators having a total adjusted basis of$6,800 for a new cultivator costing $13,200. They received an $8,000trade-in for the old cultivators and paid $5,200 cash for the newcultivator. J-Bar also traded a used pickup truck with an adjustedbasis of $8,000 for a new pickup truck costing $15,000. They receiveda $5,000 trade-in and paid $10,000 cash for the new pickup truck. J-Bar Farms' basis in the new property includes both the adjustedbasis of the property traded and the cash paid. However, only the cashpaid by J-Bar qualifies for the section 179 deduction. J-Bar'sbusiness costs that qualify for a section 179 deduction are $15,200($5,200 + $10,000), the part of the cost of the new property notdetermined by the property traded. Qualifying Property Qualifying section 179 property is depreciable property andincludes the following. Tangible personal property. Other tangible property (except most buildings and theirstructural components) listed below. Property used as an integral part of manufacturing,production, or extraction, or of furnishing transportation,communications, electricity, gas, water, or sewage disposalservices. A research facility used in connection with any of theactivities in (a). A facility used in connection with any of the activities in(a) for the bulk storage of fungible commodities (includingcommodities in a liquid or gaseous state). Single purpose agricultural (livestock) or horticulturalstructures (defined later). Storage facilities (excluding buildings and their structuralcomponents) used in connection with distributing petroleum or anyprimary product of petroleum. Tangible personal property.Tangible personal property is any tangible property that is notreal property. Machinery and equipment are examples of tangiblepersonal property. Land and land improvements are not tangible personal property andthey do not qualify as section 179 property. Items such as buildingsand other permanent structures and their components are real property.Non-agricultural fences, swimming pools, paved parking areas, wharfs,docks, bridges, and fences are examples of land improvements. However,agricultural fences do qualify as section 179 property. Business property.All business property, other than structural components, containedin or attached to a building is tangible personal property. Milktanks, automatic feeders, barn cleaners, and office equipment aretangible personal property. Livestock.Livestock is qualifying property. For this purpose, livestockincludes horses, cattle, hogs, sheep, goats, and mink and otherfurbearing animals. Single purpose agricultural (livestock) or horticulturalstructures.A single purpose agricultural (livestock) or horticulturalstructure is qualifying property for purposes of the section 179deduction. For purposes of determining whether a structure is a singlepurpose agricultural structure, poultry is considered livestock. Agricultural structure.A single purpose agricultural (livestock) structure is any buildingor enclosure specifically designed, constructed, and used for both ofthe following purposes. To house, raise, and feed a particular type of livestock andits produce. To house the equipment, including any replacements, neededto house, raise, or feed the livestock. Single purpose structures are qualifying property if used, forexample, to breed chickens or hogs, produce milk from dairy cattle, orproduce feeder cattle or pigs, broiler chickens, or eggs. The facilitymust include, as an integral part of the structure or enclosure,equipment necessary to house, raise, and feed the livestock. Horticultural structure.A single purpose horticultural structure is either of thefollowing. A greenhouse specifically designed, constructed, and usedfor the commercial production of plants. A structure specifically designed, constructed, and used forthe commercial production of mushrooms. Use of structure.A structure must be used only for the purpose that qualified it.For example, a hog barn will not be eligible property if you use it tohouse poultry. Similarly, using part of your greenhouse to sell plantswill make the greenhouse ineligible. If a structure includes work space, that structure is a singlepurpose agricultural or horticultural structure if the work space isused only for the following. Stocking, caring for, or collecting livestock or plants ortheir produce. Maintaining the enclosure or structure. Maintaining or replacing the equipment or stock enclosed orhoused in the structure. Partial business use.When you use property for business and nonbusiness purposes, youcan elect the section 179 deduction only if you use it more than 50%for your business in the year you place it in service. You figure thepart of the cost of the property that is for business use bymultiplying the cost of the property by the percentage of businessuse. The result is your business cost, which you use to figure yoursection 179 deduction. Nonqualifying Property Generally, the section 179 deduction cannot be claimed on the costof any of the following. Property you hold only for the production of income. Real property, including buildings and their structuralcomponents. Property you acquired from certain groups or persons. Air conditioning or heating units. Certain property used predominately outside the U.S. Property used predominately to furnish lodging or inconnection with the furnishing of lodging. Property used by foreign persons or entities. Certain property you lease to others (if you are anoncorporate lessor). For more information on nonqualifying property, seeNonqualifying Property in chapter 2 of Publication 946. For the kind of leased property on which you can claim the section179 deduction, see Qualifying Property in chapter 2 ofPublication 946. Production of income.Property you hold for the production of income includes investmentproperty, rental property (if renting property is not your trade orbusiness), and property that produces royalties. If you use propertyin the active conduct of a trade or business, you do not hold itonly for the production of income. Acquired from certain groups or persons.Property does not qualify for the section 179 deduction if any ofthe following apply. The property is acquired by one member of a controlled groupfrom another member of the same group. The property's basis is determined in either of thefollowing ways. In whole or in part by its adjusted basis in the hands ofthe person from whom it was acquired. Under stepped-up basis rules for property acquired from adecedent. The property is acquired from a related person. A "relatedperson" generally means a member of your immediate family(including your spouse, an ancestor, and a lineal descendant) or apartnership or corporation in which you hold an interest. For more information on related persons, see Publication 946. How To Make the Election You make the election by taking your deduction on Form 4562. Youattach and file Form 4562 with either of the following. Your original tax return filed for the year the property wasplaced in service (whether or not you filed it timely). An amended return filed by the due date (includingextensions) for your return for the year the property was placed inservice. In other words, you cannot make an election for the section179 deduction on an amended return filed after the due date (includingextensions) of the original return. However, if you timely filed your return for the year withoutmaking the election, you can still make the election by filing anamended return within six months of the due date of the return(excluding extensions). Attach the election to the amended return andwrite "Filed pursuant to section 301.9100-2" on theelection statement. File the amended return at the same address youfiled the original return. How To Figurethe Deduction The total business cost you can elect to deduct under section 179for 1999 cannot be more than $19,000. This maximum dollar limitapplies to each taxpayer, not to each business. You do not have toclaim the full $19,000. You can decide how much of the business costof your qualifying property you want to deduct under section 179. Youmay be able to depreciate any cost you do not deduct under section179. To figure depreciation, see MACRS, later. If you acquire and place in service more than one item ofqualifying property during the year, you can divide the deductionamong the items in any way, as long as the total deduction is not morethan $19,000. If you have only one item of qualifying property and it does notcost more than $19,000, your deduction is limited to the lesser of thefollowing. Your taxable income from your trade or business (the taxableincome limit is discussed later). The cost of the item. You must figure your section 179 deduction before figuring yourdepreciation deduction. You must subtract the amount you elect to deduct under section 179from the business/investment cost of the qualifying property. Theresult is your unadjusted basis and it is the amount you use to figureany depreciation deduction. Caution: You cannot take depreciation on the cost of property you deductunder section 179.   Example.This year, you bought and placed in service a tractor for $16,000and a mower for $6,200 for use in your farming business. You elect todeduct the entire $6,200 for the mower and $12,800 for the tractor, atotal of $19,000. This is the most you can deduct. Your $6,200deduction for the mower completely recovered its cost. The cost ofyour tractor is reduced by $12,800. Its remaining basis fordepreciation is $3,200. You figure this by subtracting the amount ofyour section 179 deduction, $12,800, from the cost of the tractor,$16,000. Deduction Limits Your section 179 deduction cannot be more than the business cost ofthe qualifying property. In addition, in figuring your section 179deduction, you must apply the following limits. Maximum dollar limit. Investment limit. cheap hotel in AarhusTaxable income limit. Maximum dollar limit.The total cost you can elect to deduct for 1999 cannot be more than$19,000. This maximum dollar limit is reduced if you go over theinvestment limit (discussed later) in any year. TaxTip: The total deductible cost of section 179 property increases infuture years as shown next. Tax Year Maximum Deduction 2000 $20,000 2001 - 2002 24,000 After 2002 25,000 Passenger automobiles.For passenger automobiles placed in service in 1999, your totalsection 179 deduction and depreciation cannot be more than $3,060. Formore information, see Maximum deductions for 1999 underSpecial Rules for Passenger Automobiles, later. Joint returns.If you file a joint return, you and your spouse are treated as onetaxpayer in determining any reduction to the maximum dollar limit,regardless of which of you purchased the property or placed it inservice. Married taxpayers filing separate returns.If you and your spouse file separate returns, you both are treatedas one taxpayer for the maximum dollar limit and for the $200,000investment limit. Unless you elect otherwise, 50% of the maximumdollar limit (after applying the investment limit) will be allocatedto each of you. If the percentages elected by each of you do not total100%, 50% will be allocated to each of you. Joint return after filing separate returns.If you and your spouse elect to file a joint return after the duedate for filing the return, the maximum dollar limit on the jointreturn is the lesser of the following. The maximum dollar limit (after the investmentlimit). The total cost of section 179 property you and your spouseelected to expense on your separate returns. Investment limit.If the cost of your qualifying section 179 property placed inservice in a year is over $200,000, reduce the maximum dollar limitfor each dollar over $200,000 (but not below zero). If your businesscost of section 179 property placed in service during 1999 is $219,000or more, you cannot take a section 179 deduction and you cannot carryover the cost that is more than $219,000. Example.In 1999, James Smith placed in service machinery costing $207,000.Because this cost is $7,000 more than $200,000, he must reduce themaximum dollar limit of $19,000 by $7,000. If his taxable income is atleast $12,000, James can claim a $12,000 section 179 deduction forthis year. Taxable income limit.The total cost you can deduct each year is limited to the taxableincome from the active conduct of any trade or business during theyear. Generally, you are considered to actively conduct a trade orbusiness if you meaningfully participate in the management oroperations of the trade or business. Figure taxable income for this purpose by totaling the net income(or loss) from all trades and businesses you actively conducted duringthe year. Items of income derived from a trade or business activelyconducted by you include the following. Section 1231 gains (or losses) as discussed in chapter 11. Interest from working capital of your trade orbusiness. Wages, salaries, tips, or other pay earned as anemployee. When figuring taxable income, do not take into account anyunreimbursed employee business expenses you may have as an employee. In addition, figure taxable income without regard to any of thefollowing. The section 179 deduction. The self-employment tax deduction. Any net operating loss carryback or carryforward. Saas Fee Encontrar hotelesCarryover of disallowed deduction.You can carry over the cost of any section 179 property you electedto expense but were unable to because of the taxable income limit. The amount you carry over is used in determining your section 179deduction in the next year; however, it is subject to the limits inthat year. You may select the properties for which all or a part ofthe cost will be carried forward, provided the reasons for yourdecisions are shown in your books and records. Example.Last year, Joyce Jones placed in service a machine that cost$8,000. The taxable income from her business (determined without asection 179 deduction for the cost of the machine and without theself-employment tax deduction) was $6,000. Her section 179 deductionis limited to $6,000. The $2,000 cost that is not allowed as a currentsection 179 deduction (because of the taxable income limit) is carriedto this year. This year, Joyce placed another machine in service that cost$9,000. Her taxable income from business (determined without a section179 deduction for the cost of the machine and without theself-employment tax deduction) is $10,000. Joyce can deduct the fullcost of the machine ($9,000) but only $1,000 of the carryover fromlast year because of the taxable income limit. She can carry over thebalance of $1,000 to next year. See Carryover of disallowed deduction in chapter 2 ofPublication 946for information on figuring the carryover. Two different taxable income limits.The section 179 deduction is subject to a taxable income limit. Youalso may have to figure another deduction (for example, charitablecontributions) that has a limit based on taxable income. If you haveto figure the limit for this other deduction taking into account thesection 179 deduction, complete the steps discussed next. Step 1.Figure taxable income without the section 179 deduction or theother deduction. Step 2.Figure a hypothetical section 179 deduction using the taxableincome figured in Step 1. Step 3.Subtract the hypothetical section 179 deduction figured in Step 2from the taxable income figured in Step 1. Step 4.Figure a hypothetical amount for the other deduction using theamount figured in Step 3 as taxable income. Step 5.Subtract the hypothetical other deduction figured in Step 4 fromthe taxable income figured in Step 1. Step 6.Now figure your actual section 179 deduction using the taxableincome figured in Step 5. Step 7.Subtract your actual section 179 deduction figured in Step 6 fromthe taxable income figured in Step 1. Step 8.Figure your actual other deduction using the taxable income figuredin Step 7. Example.During the year, the XYZ farm corporation purchased and placed inservice qualifying section 179 property that cost $10,000. It electsto expense as much as possible under section 179. The XYZ corporationalso gave a charitable contribution of $1,000 during the year. Acorporation's deduction for charitable contributions cannot be morethan 10% of its taxable income, figured after subtracting any section179 deduction. The taxable income limit for the section 179 deductionis figured after subtracting any allowable charitable contributions.XYZ's taxable income figured without the section 179 deduction or thededuction for charitable contributions is $12,000. XYZ figures itssection 179 deduction and its deduction for charitable contributionsas follows. Step 1. Taxable income figured without eitherdeduction is $12,000. Step 2. Using $12,000 as taxable income, XYZ'shypothetical section 179 deduction is $10,000. Step 3. $12,000 (from Step 1) minus $10,000 (fromStep 2) equals $2,000. Step 4. Using $2,000 (from Step 3) as taxableincome, XYZ's hypothetical charitable contribution (limited to 10% oftaxable income) is $200. Step 5. $12,000 (from Step 1) minus $200 (fromStep 4) equals $11,800. Step 6. Using $11,800 (from Step 5) as taxableincome, XYZ figures the actual section 179 deduction. Because thetaxable income is at least $10,000, XYZ can take a $10,000 section 179deduction. Step 7. $12,000 (from Step 1) minus $10,000 (fromStep 6) equals $2,000. Step 8. Using $2,000 (from Step 7) as taxableincome, XYZ's actual charitable contribution (limited to 10% oftaxable income) is $200. Partnerships and S corporations.The section 179 deduction limits apply both to the partnership or Scorporation and to each partner or shareholder. The partnership or Scorporation determines its section 179 deduction subject to thelimits. It then allocates the deduction among its partners orshareholders. If you are a partner or shareholder, you add the amount allocatedfrom the partnership or S corporation to any 179 costs that are notrelated to the partnership or S corporation and then apply the maximumdollar limit to this total. To determine if you exceed the $200,000investment limit, you do not include any of the cost of section 179property placed in service by the partnership or S corporation. Afteryou apply the maximum dollar limit and investment limit, you apply thetaxable income limit to any remaining section 179 costs. For moreinformation see chapter 2 of Publication 946.