Can Section 179 deductions be applied to both new and used equipment purchases?
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Yes, Section 179 deductions can be applied to both new and used equipment purchases, provided certain requirements are met.
1. Legal Basis and Requirements
Section 179 allows a taxpayer to elect to expense the cost of "section 179 property" rather than depreciate it over time. The law defines "section 179 property" as property that is:
- Tangible property to which section 168 applies (i.e., depreciable property under MACRS), or
- Computer software as defined in section 197(e)(3)(B) and described in section 197(e)(3)(A)(i) and to which section 167 applies,
- Which is section 1245 property (as defined in section 1245(a)(3)), or at the taxpayer’s election, qualified real property (as defined in section 179(e)),
- Acquired by purchase for use in the active conduct of a trade or business.
2. IRS Guidance
IRS Publication 946 and the Instructions for Form 4562 confirm that both new and used property can qualify for the Section 179 deduction, as long as the property is acquired by purchase and is not acquired from a related party or by gift or inheritance.
Specifically, the IRS states:- "To qualify for the section 179 deduction, your property must be one of the following types of depreciable property: Tangible personal property... Single purpose agricultural (livestock) or horticultural structures... Off-the-shelf computer software... Qualified section 179 real property...".- "Property acquired by purchase. To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify. Property is not considered acquired by purchase in the following situations: It is acquired by one component member of a controlled group from another component member of the same group. Its basis is determined either: In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. It is acquired from a related person.".
3. Summary Table from IRS Publication 946
- New property: Qualifies if all other requirements are met.
- Used property: Qualifies if all other requirements are met (i.e., not acquired from a related party, not by gift/inheritance, not with a carryover basis).
4. Key Limitations
- The property must be acquired by purchase for use in the active conduct of a trade or business.
- Property acquired from related parties, by gift, or by inheritance does not qualify.
- The property must not be used predominantly outside the United States, by tax-exempt organizations (except in a taxable unrelated trade or business), or by governmental units (with certain exceptions).
- There are annual dollar limits and phase-outs based on the total amount of Section 179 property placed in service during the year.
5. Conclusion
Section 179 deductions can be applied to both new and used equipment purchases, as long as the property is acquired by purchase (not from a related party, not by gift or inheritance, and not with a carryover basis) and is used in the active conduct of a trade or business. The property must otherwise meet all the requirements of section 179 property.
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