What is Section 179?
Section 179 is called a loophole by some. For anyone with any tax experience, however, it is as standard in the IRS world as claiming mileage. Section 179 (Form 4562) allows people claiming items (meeting the criteria listed below) to simply expense certain things instead of depreciating them. This means you get to claim all of the money paid for the item in the year you purchase it and put it to business use (assuming 100% business use). Depreciation makes you spread that benefit out over multiple years.
In order to use Section 179:
You must have taxable income of at least the amount you expense. This taxable income can come from the business, another business claimed by you, other wages and tips, and even the wages and tips of your spouse if married filing jointly. You can either expense (Section 179) or depreciate, not both, on the same item in the same year. Though there are special rules enabling you to depreciate the remaining amount of an item in future years you were not able to fully expense this year. You must use the item more than 50% for business purposes. If you use it less than 100% for business, you can only claim the percentage of the purchase price based on the percentage used in business (business percentage). You should still use that equipment 50% or more for business purposes over the number of years you would have otherwise been allowed to depreciate it (class life explained on page 60 in book).
Section 179 does NOT apply to:
Real estate Inventory Gifts or inheritance Property purchased from a relative Items you already owned in a previous year and are converting to business Heating and air conditioner units
Basically, if you purchase equipment for your business, Section 179 gives you a way to deduct the cost in one year, instead of little by little over multiple years.
Limits:
The current total dollar amount allowed in Section 179 deductions is $125,000. Section 179 deductions are reported on Form 4562. If your income does not support deducting the full amount of deductions you have, you can carry forward your deductions to the following year, assuming you have taxable income equal to or greater than your current and carry over deductions in that following year. Or, you may elect to depreciate the remaining amount in years to come.
Listed Property – Section 179
Section 179 has provisions for certain assets the IRS considers having the potential for personal use. These items are called listed property. Computers, vehicles, and cell phones all fall into this category. For these items, you must keep detailed records of business versus personal use. Just keep a notebook next to the computer, for instance. Whenever the item is in use, jot down when and for how long, and whether it was business or personal. You will use these records to determine your business percentage of usage, if it is not 100% for business purposes. Divide the business time used by the total time used. Your answer will be a decimal number. Multiply that decimal by 100. The result is your business percentage.
The rules discussed in this article refer to the sole proprietor. Other rules may apply if you are filing under a different tax entity.
