The Section 179 Deduction: It Has Come a Long Way
Internal Revenue Code Section 179, Election to Expense Certain Depreciable Business Assets, was enacted by Congress as part of the Technical Corrections Act of 1958. The original deduction limit was $10,000. This provision allows taxpayers other than estates and trusts to expense in full various fixed asset additions used in their trade or business in the year of acquisition with certain limitations. Some states, such as New York, have piggybacked Sec. 179. Other states, such as New Jersey, have decoupled from Federal Sec. 179 and have their own rules (covered in greater detail at the end of this article).
Sec. 179 has been tinkered with by many tax acts over its 60 years of existence. Most recently, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made permanent the $500,000 expensing limitation and $2 million additions threshold at which the Sec. 179 expense deduction is phased out. Beginning in 2016, these items are indexed for inflation. For 2017 tax years, the Sec. 179 limitation is $510,000 with the phase-out beginning once Sec. 179 additions for the year exceed $2,030,000.
Property qualifying for Sec. 179 expense includes most tangible property aside from buildings and their structural components, off-the-shelf computer software and “qualified section 179 real property” — qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. Used property qualifies for Sec. 179 expense, which is a distinct difference from bonus depreciation where only newly acquired property qualifies.
A special rule applies for Sec. 179 expense on sport utility vehicles (SUVs). The Sec. 179 expense deduction is limited to $25,000 for any SUV or other vehicle rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. The $25,000 limit does not apply to a vehicle designed to seat more than nine persons beside the driver’s seat, equipped with a cargo area of at least six feet in interior length that is not readily accessible directly from the passenger compartment, or that has an integral enclosure fully enclosing the driver compartment, does not have seating rearward of the driver’s seat and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.
In claiming a Sec. 179 expense deduction for qualifying fixed asset additions, the deduction cannot exceed the business income limitation. For individuals, one computes total taxable income from the trade or business before the Sec. 179 expense deduction, the deduction for one-half of self-employment taxes and any net operating loss deduction. Wages are added to this calculation. Thus a taxpayer that incurs a loss from a sole proprietorship on Schedule C can claim Sec. 179 expense to the extent they reported wages in excess of the Schedule C loss thus producing positive trade or business taxable income. For S corporations, compensation paid to shareholder-employees (often but not always officers) is added back to net income so it is not unusual for an S corporation to incur a loss yet report Sec. 179 expense on Schedules K and K-1.
A taxpayer makes a Sec. 179 election simply by completing Part I of IRS Form 4562 either on their original income tax return or on an amended tax return. Any unused Sec. 179 expense deduction is carried over to the following year. The carryover is indefinite. No carryback of unused Sec. 179 expense is permitted. A recapture rule exists where if the section 179 property is not used more than 50 percent in the trade or business at any time before the end of the property’s recovery period, the benefit of the Sec. 179 expense deduction must be reported as other income.
For 2001 the Sec. 179 expense limit was $25,000 with the deduction phased-out once fixed asset additions exceeded $200,000. For New Jersey purposes these thresholds from 2001 remain in place as all subsequent Federal increases have been ignored for state purposes. Thus, if Sec. 179 additions for a tax year exceed $225,000, no Sec. 179 expense deduction can be claimed for New Jersey purposes. Combine this with the state having decoupled from bonus depreciation and the end result is much slower depreciation deductions over time.
Neil B. Becourtney
Neil B. Becourtney, CPA, is a tax partner with the Holmdel New Jersey office of CohnReznick LLP. He is a member of the NJCPA Federal Taxation and State Taxation interest groups.
This article appeared in the January/February 2018 issue of New Jersey CPA magazine. Read the full issue.