What are the IRS rules regarding expensing machinery under Section 179 for business taxpayers?
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The IRS rules for expensing machinery under Section 179 for business taxpayers in 2025 are as follows:
1. Eligibility of Property
- Machinery qualifies as "section 179 property" if it is tangible personal property acquired by purchase for use in the active conduct of a trade or business. This includes most machinery and equipment, as well as certain qualified real property improvements (such as HVAC, roofs, fire protection, and security systems for nonresidential real property).
- The property must be used more than 50% for business purposes in the year it is placed in service. If used for both business and personal purposes, only the business-use portion is eligible, and the property must meet the "more than 50% business use" test.
2. Dollar Limits for 2025
- For tax years beginning in 2025, the maximum Section 179 deduction is $2,500,000.
- The deduction begins to phase out dollar-for-dollar when the total cost of Section 179 property placed in service during the year exceeds $4,000,000. If the cost exceeds $4,000,000, the deduction is reduced by the excess, and is completely phased out at $6,500,000.
3. Business Income Limitation
- The Section 179 deduction cannot exceed the taxpayer’s aggregate taxable income from the active conduct of all trades or businesses during the year. Any amount not deductible because of this limitation can be carried forward to future years.
4. Application and Election
- The election to expense machinery under Section 179 is made by completing Part I of Form 4562 and attaching it to the taxpayer’s timely filed tax return (including extensions) for the year the property is placed in service. The election specifies which assets and what portion of their cost is being expensed.
- The election can be revoked by filing an amended return within the time prescribed by law, but once revoked, it is irrevocable.
5. Special Rules and Limitations
- Estates and trusts cannot claim the Section 179 deduction.- Noncorporate lessors generally cannot claim the deduction unless they meet specific requirements (e.g., the lease term is less than 50% of the class life and certain expense thresholds are met).- Property acquired by gift, inheritance, or from related parties (as defined in Section 267 or 707(b)) does not qualify.
- The deduction is not prorated for the portion of the year the property is in service; the full deduction is available as long as the property is placed in service during the tax year.
6. Recapture Rules
- If, during the recovery period, the business use of the machinery drops to 50% or less, a recapture of the Section 179 deduction is required. The recaptured amount is included as ordinary income in the year of the change, and the basis of the property is increased by the recapture amount.
7. Coordination with Bonus Depreciation
- Section 179 expensing is applied before bonus depreciation. After the Section 179 deduction is claimed, any remaining basis may be eligible for bonus depreciation (which, for property acquired after January 19, 2025, is 100%) and then regular MACRS depreciation.
8. Partnerships, S Corporations, and Controlled Groups
- The Section 179 limits apply at both the entity and owner level. For partnerships and S corporations, the deduction is allocated to partners/shareholders, who then apply the limits on their own returns.
- All members of a controlled group are treated as a single taxpayer for purposes of the Section 179 limits, and the deduction must be apportioned among the group.
9. Recordkeeping
- Taxpayers must maintain records identifying each piece of Section 179 property, including acquisition details, cost, and business use percentage.
10. Summary Table of 2025 Section 179 Limits:
These rules allow business taxpayers to immediately expense the cost of machinery (up to the annual limits) rather than depreciating it over several years, providing a significant tax benefit and cash flow advantage.
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