For purposes of income tax, deduction on assets is done through depreciation at the end of the year. However, under section 179 of the internal revenue code, assets can be expensed by deducting them in the year they were bought and put into service. The property allowed must be tangible depreciable property acquired for the use of a trade business. More than fifty percent of the property must be used for business purposes in the year the asset is brought to use. It however does not apply to property placed in service before 1987.

            Assets that are entitled to deduction according to section 179 are discussed below. Eligible property must be acquired by purchase and should not be classified later as property that does not apply. They must be tangible assets and not real property. They include single purpose agricultural and horticultural structures such as livestock, fruit trees, green houses, and vineyards among others. Storage facilities are also tangible assets that qualify for deduction. They comprise of gas storage tanks, gasoline stores and pumps at retail outlets. Property that is attached to the building or contained inside qualifies for the deduction. Such property includes testing equipment, signs, store counters, printing presses, refrigerators and other equipments. If property is bought as a trade-in of another property then the amount that qualifies is only the cash amount that you paid and does not include the cost of the asset used in the trade in.

            Off the shelf computers are also eligible for deduction but they must be available for purchase by general public and not subject to a non-exclusive license. Incase of property used partially for business, the amount deducactable should be the percentage of the amount used fro business which must not be less than fifty percent.

            Real property including buildings, land improvements and structural components, airways, air conditioning, immovable billboards, roads, rental property, swimming pools among others does not qualify for section 179 deductions. Property acquired for the generation of income such as rental property and investment property does not qualify as well not unless you are in the rental business. Property that produces loyalties is not considered. Other property not allowed include lease property, property used outside the states, property held by an estate or trust, property used by foreign persons and by tax exempt organizations among others. Property brought from close relatives is also not an allowable expense.

            Section 179 however is subject to a dollar limit. A business may not deduct expenses for all assets acquired and put into use during the year. It is also subject to an income limit. Section 179 however allows for the carryover of the disallowed deduction due to income limit for an unlimited number of years following the purchase of the asset. The maximum amount of deduction allowed in 2007 was one hundred and twenty five thousand dollars ($125,000). Currently it is at two hundred and fifty thousand dollars ($250,000). However, you do not have to claim the whole two hundred and twenty five thousand dollars. If the cost for the qualifying assets placed in service in a year exceeds eight hundred thousand dollars ($800,000), the company must reduce the dollar limit by the amount that exceeds eight hundred thousand dollars. For example Smith bought a machine for $890,000. His allowable deduction will be $90,000 ($890,000 – $800,000).

Special cases in dollar limit

            Special rates apply for enterprise zone and renewal community businesses where the dollar limit is increased by the smaller of thirty five thousand dollars ($35,000) or the cost that qualifies as zone property under section 179. When figuring reduced dollar limit for costs exceeding $800, 000, fifty percent of the cost is used for enterprise zone and renewal community businesses. Gulf Opportunity zone properties have an increased section 179 deduction available to them. It is increased by the smaller of one hundred thousand and the cost qualified as Gulf Opportunity Zone by section 179. When determining reduced dollar limits for amounts exceeding $800,000, it is increased by the lesser of six hundred thousand dollars ($600,000) or the cost qualified for property placed in service during the year.

            For sport utility vehicles and other certain vehicles between six thousand pounds and fourteen thousand pounds which are designed to carry passengers in public highways and streets are allowed twenty five thousand dollars ($25,000) expense deduction. Other special cases of dollar limit are: Married couples where the figure can be obtained jointly or separately depending on whether they file jointly or separately. If jointly, one hundred percent is allocated to both while fifty percent is allocated in case of separate.  For partnerships, section 179 deduction limit applies to both the partnership and the individual partners.

The future of section 179

            Currently, the dollar limit is two hundred and fifty dollars Companies purchasing more than five hundred thousand dollars worth of property are also required to reduce the dollar. The economic stimulus act of 2008 required changes to be made in different sectors of the economy and section 179 was one of them. The act changed the investment limit and dollar limits for property to be bought in following years. In the year 2010 these figures are bound to decrease from two hundred and fifty thousand dollars to one hundred and thirty three thousand dollars ($250,000 to $133,000) and from eight hundred thousand dollars to five hundred and thirty thousand dollars ($800,000 to $530,000) respectively. The investment limit has been adjusted for inflation over the years. However no adjustment will be done for the year 2011 onwards with the dollar limit amounting to and an investment limit of $200,000.  Those willing to use the depreciation method are free to do so instead of using the expenses deductions method.

References

Arkansas TAXGURU, (2009). Section 179 deduction.

            from http//www.taxguru.org/incometax/Rates/Sec179.htm

Internal Revenue Service, (2007). Publication 946. U. S Government publications