What are the requirements for taking a Section 179 deduction?
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The requirements for taking a Section 179 deduction are detailed in the Internal Revenue Code, Treasury Regulations, and IRS guidance. For tax year 2025, the following requirements and limitations apply:
1. Qualifying Property
To be eligible for the Section 179 deduction, the property must meet all of the following criteria:
- Type of Property: The property must be:
- Tangible personal property (not real property), such as machinery, equipment, vehicles, computers, and office furniture.
- Certain other tangible property (except buildings and their structural components) used as an integral part of manufacturing, production, extraction, or furnishing transportation, communications, electricity, gas, water, or sewage disposal services.
- Single-purpose agricultural or horticultural structures.
- Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
- Off-the-shelf computer software (software that is readily available for purchase by the general public, subject to a nonexclusive license, and not substantially modified).
- Qualified section 179 real property, which includes qualified improvement property and certain improvements to nonresidential real property (roofs, HVAC, fire protection and alarm systems, security systems) placed in service after the building was first placed in service.
- Business Use: The property must be used more than 50% for business in the year it is placed in service. If used for both business and personal purposes, only the business-use portion qualifies.
- Acquired by Purchase: The property must be acquired by purchase for use in the active conduct of a trade or business. Property acquired by gift, inheritance, or from certain related parties does not qualify. The property must not be acquired from a related person as defined in section 267 or 707(b), or from a component member of a controlled group.
- Placed in Service: The property must be placed in service during the tax year for which the deduction is claimed. Merely purchasing the property is not sufficient; it must be operational and available for business use.
2. Property That Does Not Qualify
- Land and land improvements (such as swimming pools, paved parking areas, wharves, docks, bridges, and fences not used in agriculture) do not qualify.
- Property used mainly outside the United States (with limited exceptions).
- Property used by tax-exempt organizations (unless used in a taxable, unrelated trade or business).
- Property used by governmental units or foreign persons/entities (unless leased for a term of less than 6 months).
- Property held for investment, or used for lodging (with certain exceptions).
- Property acquired by gift or inheritance, or from related parties as described above.
- Estates and trusts cannot claim the Section 179 deduction.
3. Dollar Limitations (2025)
- The maximum Section 179 deduction for 2025 is $2,500,000.
- The deduction is reduced dollar-for-dollar by the amount by which the cost of Section 179 property placed in service during the year exceeds $4,000,000. If the cost of qualifying property placed in service exceeds $4,000,000, no Section 179 deduction is allowed.
- For qualifying SUVs, the maximum Section 179 deduction is $31,300 for 2025.
4. Business Income Limitation
- The Section 179 deduction cannot exceed the aggregate amount of taxable income derived from the active conduct of any trade or business during the year. Any amount not deductible because of this limitation can be carried forward to future years.
5. Special Rules
- Partnerships and S Corporations: The Section 179 limits apply both at the entity level and at the partner/shareholder level.
- Married Individuals Filing Separately: Treated as one taxpayer for purposes of the dollar limits, unless they elect otherwise.
- Controlled Groups: All component members are treated as one taxpayer for the dollar limits, and the Secretary apportions the limit among the members.
6. Order of Application
- Section 179 expensing must be applied before bonus depreciation and regular MACRS depreciation.
7. Recapture Rules
- If, in any year during the property’s recovery period, the percentage of business use drops to 50% or less, the benefit of the Section 179 deduction must be recaptured as ordinary income. The recapture amount is the difference between the Section 179 deduction claimed and the depreciation that would have been allowable under MACRS.
8. Recordkeeping
- Taxpayers must maintain records showing the specific identification of each piece of qualifying Section 179 property, how it was acquired, from whom, and when it was placed in service.
9. State Conformity
- Some states do not conform to the federal Section 179 limits and may have lower caps or require addbacks. Businesses operating in multiple states must check each state’s rules.
10. Summary of Requirements:
- The property must be qualifying tangible personal property (or certain real property improvements or off-the-shelf software).
- It must be acquired by purchase for use in an active trade or business.
- It must be placed in service during the tax year.
- The deduction is subject to annual dollar and business income limits.
- Certain property types and acquisition methods are excluded.
- Proper record keeping and compliance with recapture rules are required.
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