What are common mistakes to avoid when filing for IRS Section 179?
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When filing for the IRS Section 179 deduction, there are several common mistakes that taxpayers—especially small businesses and farmers—should avoid to ensure compliance and maximize their allowable deduction. Below is a comprehensive analysis of these pitfalls, with references to the Internal Revenue Code, Treasury Regulations, and relevant IRS guidance.
1. Claiming Ineligible Property
Mistake: Attempting to expense property that does not qualify under Section 179.
- Section 179 property must be tangible personal property (not real property), certain computer software, or qualified real property (such as qualified improvement property and certain improvements to nonresidential real property) that is acquired by purchase for use in the active conduct of a trade or business.
- Land and land improvements (e.g., swimming pools, paved parking areas, fences not used for agricultural purposes) do not qualify.
- Property acquired by gift or inheritance is not eligible.
- Property acquired from related parties (spouse, ancestors, lineal descendants) is not eligible.
2. Exceeding Dollar and Investment Limits
Mistake: Failing to apply the annual dollar limit and phase-out threshold.
- For 2025, the maximum Section 179 deduction is $1,250,000, reduced dollar-for-dollar by the amount by which the cost of Section 179 property placed in service exceeds $3,130,000.
- If the cost of Section 179 property placed in service during the year is $4,380,000 or more, no Section 179 deduction is allowed.
- For SUVs, a separate, lower limit applies: $31,300 for 2025.
3. Ignoring the Business Income Limitation
Mistake: Deducting more than the taxable income from the active conduct of a trade or business.
- 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 disallowed due to this limitation can be carried forward indefinitely.
4. Failing to Apply the Correct Order of Deductions
Mistake: Not applying Section 179 before bonus depreciation and regular MACRS depreciation.
- Section 179 must be applied first, followed by bonus depreciation (if elected), and then regular MACRS depreciation on any remaining basis.
5. Not Meeting the “More Than 50% Business Use” Requirement
Mistake: Claiming Section 179 on property not used more than 50% for business in the year placed in service.
- If business use drops to 50% or less in any year during the recovery period, a recapture of the deduction is required.
6. Improper Allocation Among Multiple Businesses or Spouses
Mistake: Not properly allocating the Section 179 limit among multiple businesses or between spouses filing separately.
- The dollar limit applies to the taxpayer, not to each business. If married filing separately, the limit must be allocated between spouses unless they elect a different allocation.
7. Incorrect Basis Calculation
Mistake: Failing to reduce the basis of property by the Section 179 deduction before calculating depreciation.
- The basis for depreciation must be reduced by the amount of Section 179 expensed.
8. Not Properly Electing or Revoking the Deduction
Mistake: Not making the election on a timely filed return or not following the correct procedure to revoke or amend the election.
- The election must specify the property and amount and be made on the original or an amended return filed within the time prescribed by law.
- Revocation of the election (or any specification) can be made on an amended return within the prescribed time, but once revoked, it is irrevocable.
9. Failing to Recapture the Deduction When Required
Mistake: Not recapturing the Section 179 deduction if business use drops to 50% or less during the recovery period.
- The recapture amount must be included as ordinary income in the year the business use drops.
10. Inadequate Recordkeeping
Mistake: Not maintaining adequate records to substantiate the Section 179 deduction.
- Taxpayers must keep records showing the specific identification of each piece of qualifying property, how it was acquired, from whom, and when it was placed in service.
11. Claiming Section 179 for Leased Property (Noncorporate Lessors)
Mistake: Noncorporate lessors claiming Section 179 on property leased to others without meeting the special requirements.
- Noncorporate lessors generally cannot claim Section 179 unless the property was manufactured or produced by the lessor, or the lease term is less than 50% of the class life and certain other requirements are met.
12. Not Adjusting for Like-Kind Exchanges and Trade-Ins
Mistake: Claiming Section 179 on the full cost of property acquired in a like-kind exchange or trade-in.
- Only the excess basis (cash paid or boot) is eligible for Section 179; the carryover basis is not.
13. Summary Table of Key Section 179 Mistakes to Avoid:
- Expensing ineligible property (e.g., land, inherited/gifted assets, property from related parties).
- Exceeding annual dollar and investment limits.
- Ignoring the business income limitation.
- Applying deductions in the wrong order.
- Failing the >50% business use test.
- Improper allocation among businesses or spouses.
- Incorrect basis calculation for depreciation.
- Not properly electing or revoking the deduction.
- Failing to recapture when business use drops.
- Inadequate recordkeeping.
- Improper claims by noncorporate lessors.
- Not adjusting for like-kind exchanges/trade-ins.
By carefully following the requirements in Section 179 and related IRS guidance, and by avoiding these common mistakes, taxpayers can maximize their deduction and reduce the risk of IRS challenge or recapture.
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