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Health & Fitness

Tax Law Update, Part 3 of 3: Section 179 and you

Here's what you need to know about deducting personal property on your tax return this year.

Guest Blogger, Sal Curcuru, CPA and Partner in Cucuru & Associates, shares his expertise in this 3 part Tax Law Update. In Part 1, he explained the do’s and don’ts of home office deductions. In Part 2, he explained the Allowable Immediate Deductions for Equipment, Furniture, and Machinery. Read Part 3 below to learn about the allowable deductions for personal property under Section 179.

Section 179 and You

By: Sal Curcuru, CPA, JD, MBA

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Under the Section 179 rules, a taxpayer can elect to deduct as an expense in the year of purchase up to a specified amount of the cost of new or used tangible personal property.  The remainder of the purchase cost is depreciated over the asset’s useful life. For tax years beginning in 2010 and 2011, the dollar limitation on the expense deduction is $500,000. The amount was $250,000 for 2010 before the law change.  The Section 179 expense allowance is reduced dollar for dollar when the cost of property placed in service for the year exceeds $2 million.

Example:  ABC Corp buys machinery and equipment for $2.1 million.  Since the property placed in service exceeds the limit by $100,000, the allowable Section 179 expense is reduced by $100,000 to $400,000.

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The Section 179 expense is limited to taxable income from any of the taxpayer’s trades or businesses.  If the taxpayer operates under an S corporation or LLC, Section 179 is also subject to the taxable income of the S corporation or LLC.  However, when determining the taxable income of an S corporation or LLC, shareholder wages (for an S corporation) or guaranteed payments (for an LLC) are added back to the business’ taxable income.  Section 179 disallowed because of the taxable income limitation can be carried forward indefinitely.

  • Example:  S Corp has $100,000 of taxable income before Section 179 expense.  If S Corp buys $150,000 of equipment, its Section 179 expense is limited to its taxable income of $100,000.
  • Example 2:  Same as above example except that the $100,000 taxable income is after a $60,000 deduction for shareholder wages.  Since shareholder wages are added back to taxable income for Section 179 purposes, the adjusted taxable income is $160,000 and the S corp can claim the full $150,000 Section 179 deduction.
  • Example 3:  NEW SET OF FACTS:  Joan operates as a proprietorship and files a Schedule C (Profit or Loss from Business).  She has $2,000 of taxable income from the business and bought $5,000 of equipment.  Her husband has wages of $50,000.  Even though her proprietorship only has $2,000 of taxable income, she can claim the full $5,000 Section 179 expense because her husband’s $50,000 wages count as taxable income from a trade or business for Section 179 purposes.

If a business can immediately deduct 100% of the purchase price under Section 179 up to $500,000, when would 50% bonus depreciation ever be advantageous? 

Bonus depreciation would be advantageous if the taxable income limitation prevents the taxpayer from using the full Section 179 deduction.  Bonus depreciation is also helpful if the taxpayer has already used the full $500,000 Section 179 for the year and has bought additional assets for which it can claim bonus depreciation. Bonus depreciation can also be used to create a loss in the business which can be carried back to prior years to obtain an immediate refund.  Section 179 is limited to taxable income for the year and thus cannot be used to create a business loss that can be carried back.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

For more information visit the Curcuru & Associates, CPA, PLC website.

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