The new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act includes important depreciation changes for 2011 and 2012 that will benefit small businesses. It includes a variety of rule changes related to depreciation, but for my small business clients, the most significant rules relate primarily to the Section 179 deduction. So, this blog entry will focus on the relevant facts about Section 179, and offer an overview of Section 179.
Liberalized Section 179 Rules for 2011 and 2012
Under Section 179 of the Internal Revenue Code, a business can currently deduct the cost of qualified property placed in service during the year, within an annual limit. Prior to the Small Business Jobs Act, the limit for 2010 was $250,000. The Small Business Jobs Act increased the maximum deduction to $500,000 for 2010 and 2011.
For assets placed in service in tax years beginning in 2012, the new law increases the maximum Section 179 deduction to $125,000 (adjusted for inflation). Without this change, the maximum 2012 allowance would have been only $25,000.
What Property Qualifies?
To qualify for the section 179 deduction, your property must meet all the following requirements.
It must be eligible property.
It must be acquired for business use.
It must have been acquired by purchase.
It must not be property described later under What Property Does Not Qualify.
To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.
- Tangible personal property.
- Other tangible property (except buildings and their structural components) used as:
- An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
- A research facility used in connection with any of the activities in (a) above, or
- A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
- Single purpose agricultural (livestock) or horticultural structures.
- Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
- Off-the-shelf computer software.
Tangible personal property. Tangible personal property is any tangible property that is not real property. It includes the following property.
Machinery and equipment.
Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.
Gasoline storage tanks and pumps at retail service stations.
Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.
What Property Does Not Qualify?
Certain property does not qualify for the section 179 deduction. This includes the following.
Land and Improvements
Land and land improvements, such as buildings and other permanent structures and their components, are real property, not personal property and do not qualify as section 179 property. Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences.
Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property.
Certain property you lease to others (if you are a noncorporate lessor).
Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.
Air conditioning or heating units.
Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code.
Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income.
Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months.
Business Income Limit
The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.
Any cost not deductible in one year under section 179 because of this limit can be carried to the next year.