How do Section 179 expensing and Section 168(k) Special Depreciation Allowance interact for a sole proprietorship purchasing a tractor in 2024?
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For a sole proprietorship purchasing a tractor in 2024, the interaction between Section 179 expensing and the Section 168(k) Special Depreciation Allowance (bonus depreciation) is governed by a specific order of application and eligibility rules. Here’s a step-by-step explanation of how these provisions work together, including the relevant limitations and procedures:
1. Section 179 Expensing—First Deduction
Order of Application:Section 179 expensing is always applied first, before any bonus depreciation under Section 168(k) or regular MACRS depreciation.
Eligibility:- Tractors used in a farming business are considered tangible personal property and are eligible for Section 179 expensing.- The property must be acquired by purchase for use in the active conduct of a trade or business.
Limits for 2024:- The maximum Section 179 deduction for 2024 is $1,220,000.- This limit is reduced dollar-for-dollar by the amount by which the cost of Section 179 property placed in service during the year exceeds $3,050,000.- The deduction cannot exceed the aggregate amount of taxable income from the active conduct of any trade or business during the year. Any disallowed amount due to the income limitation can be carried forward indefinitely.
Example:If a sole proprietor buys a tractor for $150,000 and has sufficient taxable income, they may elect to expense up to $150,000 under Section 179, subject to the overall and income limits.
2. Section 168(k) Special Depreciation Allowance (Bonus Depreciation)—Second Deduction
Order of Application:After applying Section 179, the remaining basis of the tractor (if any) is eligible for bonus depreciation under Section 168(k).
Eligibility:- The tractor must be new or used property with a recovery period of 20 years or less and must be depreciated under MACRS.- The property must be acquired and placed in service after September 27, 2017, and before January 1, 2027, to qualify for bonus depreciation.
Bonus Depreciation Rate for 2024:- For property acquired and placed in service in 2024, the bonus depreciation rate is 60%.
No Income Limitation:- Unlike Section 179, bonus depreciation is not limited by taxable income and can create or increase a net operating loss.
Example (continued):If the sole proprietor expensed $120,000 of the $150,000 tractor under Section 179, the remaining $30,000 basis would be eligible for 60% bonus depreciation ($18,000). The remaining $12,000 would be depreciated under MACRS.
3. MACRS Depreciation—Third Deduction
Order of Application:After Section 179 and bonus depreciation, any remaining basis is depreciated under the regular MACRS rules for the applicable recovery period and method (typically 5 years for farm equipment placed in service after 2017).
4. Additional Considerations
- Election Out: The taxpayer may elect out of bonus depreciation for any class of property if desired.
- Recapture: If the tractor is not used predominantly in the business at any time during its recovery period, recapture rules may apply for both Section 179 and bonus depreciation.
- Listed Property: Tractors are not considered listed property, so the stricter substantiation rules for listed property do not apply.
5. Summary of Steps
- Apply Section 179 expensing to the cost of the tractor, up to the annual and income limits.
- Apply bonus depreciation (60% in 2024) to the remaining basis after Section 179.
- Depreciate any remaining basis under MACRS over the applicable recovery period.
6. Example Calculation
Suppose a sole proprietor purchases a tractor for $150,000 in 2024, has sufficient taxable income, and does not elect out of bonus depreciation:
- Section 179 deduction: $120,000 (elected)
- Remaining basis: $30,000
- Bonus depreciation (60%): $18,000
- Remaining basis for MACRS: $12,000 (depreciated over 5 years)
In summary: For a tractor purchased by a sole proprietorship in 2024, Section 179 expensing is applied first (subject to limits), then bonus depreciation (60% of the remaining basis), and finally MACRS depreciation on any remaining basis.
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