How are shipping and delivery fees treated under Section 179 when a business taxpayer purchases machinery for exclusive business use?
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When a business taxpayer purchases machinery for exclusive business use and seeks to claim a Section 179 deduction, the treatment of shipping and delivery fees is governed by the rules for determining the cost basis of the property.
1. Cost Basis for Section 179 Property
Section 179 allows a taxpayer to elect to expense the cost of qualifying property in the year it is placed in service, rather than depreciating it over time. The deduction is limited to the cost of the property, subject to annual dollar and business income limits.
The cost basis of property for Section 179 purposes is generally its purchase price plus any costs necessary to acquire the property and place it in service. According to IRS guidance:
- The basis of property you buy is its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. The cost includes the amount you pay in cash, debt obligations, other property, or services.
- For real property, the basis includes settlement fees and closing costs, but for machinery and equipment, the same principle applies: all costs necessary to acquire and place the asset in service are included in basis.
2. Shipping and Delivery Fees as Part of Cost Basis
Shipping and delivery fees are considered part of the cost of acquiring the property. The IRS specifically states that freight charges (which include shipping and delivery) are included in the cost basis of the property.
- For example, if a business purchases a machine for $10,000 and pays $500 in shipping and $200 for installation, the total cost basis for Section 179 purposes is $10,700.
- This total cost basis is the amount eligible for the Section 179 deduction, subject to the annual dollar and business income limits.
3. Section 179 Deduction Calculation
The taxpayer may elect to expense up to the full cost basis (including shipping and delivery) in the year the property is placed in service, provided the total Section 179 deduction for all property placed in service during the year does not exceed the annual limit ($2,500,000 for 2025, reduced dollar-for-dollar if total Section 179 property placed in service exceeds $4,000,000) and the deduction does not exceed the taxpayer’s business income for the year.
4. Documentation and Recordkeeping
The taxpayer should maintain records showing the purchase price, shipping and delivery fees, and any other costs included in the basis of the property. These records support the amount claimed as a Section 179 deduction and are required in the event of an IRS inquiry.
5. Summary
- Shipping and delivery fees are included in the cost basis of machinery for Section 179 purposes.
- The full cost basis (purchase price plus shipping, delivery, installation, etc.) is eligible for the Section 179 deduction, subject to annual limits and the business income limitation.
- Proper documentation should be maintained to substantiate the total cost basis claimed.
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