Section 179 Deduction
Typically, if property for business has a useful life of more than one year, the cost must be spread across
several tax years as depreciation with a portion of the cost deducted each year. But there is a way to
immediately receive these income tax benefits in one tax year. The provisions of Internal Revenue Code
Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is
purchased. And tax-law changes have made this option much more appealing by dramatically increasing the
amount that can be written off immediately. The inflation-adjusted amount for 2005 taxes is $105,000.
Property that may be written off in the tax year of purchase, rather than depreciated over the asset?s useful life,
includes:
- Machinery and equipment
- Furniture and fixtures
- Most storage facilities
- Single-purpose agricultural or horticultural structures
How and when to use the deduction:
The Section 179 election is made on an item-by-item basis for eligible property. You don?t have to use it on all
eligible property bought in that year. The election must be made in the tax year the property is first placed in
service. The Section 179 deduction isn?t automatic. Taxpayers who want to take the deduction must elect to do
so. You make the election by taking your deduction on Form 4562. When you file this form, attach it to either of
the following:
- Your original tax return filed for the tax year the property was placed in service, regardless of whether you file it timely.
- An amended return filed by the due date, including extensions, for your return for the tax year the property was placed in service.
Make sure that you make the election when you file your original income tax return for that year. You can?t later
amend your return to elect Section 179. The only exception is if you amend your return before the actual due
date, including extensions, of your original return.
For example, the maximum extended due date to file your return is Oct. 15. You file your return on Sept. 1, and
then realize you didn?t utilize the Section 179 deduction. You still have until the Oct. 15 deadline to file an
amended tax return to claim the deduction.
Conclusion:
The tax tip explains the process for using Section 179 to fully expense certain business expenses immediately
instead of depreciating them across a period of several years. You should also be aware of less obvious
advantages of the Section 179 deduction:
- Lowers adjusted gross income, which could help you qualify for various deductions that are limited by AGI.
- Lowers earned income, which can increase your earned income credit.
- Is allowed in full even if the eligible property is placed in service on the last day of the year.
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