Section 179 Deduction

Section 179 of the U.S. Internal Revenue Code allows business owners to deduct a substantial amount of money - up to $500,000 this year - of an asset's value in the first year of ownership (more precisely, the first year the property or asset is put into service). It was created 30 years ago to encourage investment and stimulate growth in the economy.

To qualify for the section 179 deduction, the property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify.

The total amount businesses can elect to deduct under section 179 for most property generally cannot be more than $500,000. If the business acquires and places in service more than one item of qualifying property during the year, it can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. The business is not obligated to claim the full $500,000.

The IRS offers the following example to illustrate the point: In 2010, the business owner bought and placed in service $500,000 in machinery and a $25,000 circular saw. The owner elects to deduct $475,000 for the machinery and the entire $25,000 for the saw -- a total of $500,000. The $25,000 deduction for the saw completely recovered its cost. The basis for depreciation is zero. The basis for depreciation of the machinery is $25,000. You figure this by subtracting the $475,000 section from the $500,000 cost of the machinery

The business owner must keep records that identify each piece of qualifying section 179 property. These records must show how the business acquired the property, the person from which the property was acquired, and when the property was placed into service.

For more information, consult Internal Revenue Service, Publication 946, "How To Depreciate Property," http://www.irs.gov/pub/irs-pdf/p946.pdf