When does the IRS allow taxpayers to utilize Section 179 expensing?
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The IRS allows taxpayers to utilize Section 179 expensing when specific statutory and regulatory requirements are met. Below is a comprehensive explanation of when and how Section 179 expensing may be used, based on the Internal Revenue Code, Treasury Regulations, and authoritative guidance.
1. Eligible Property and Use
- Section 179 property must be:
- Tangible property to which section 168 applies (generally depreciable personal property), or certain computer software, and
- Section 1245 property (as defined in section 1245(a)(3)), or, at the taxpayer’s election, qualified real property (such as qualified improvement property and certain improvements to nonresidential real property, including roofs, HVAC, fire protection, and security systems).
- Acquired by purchase for use in the active conduct of a trade or business (not for investment or personal use).
- The property must be placed in service during the taxable year for which the deduction is claimed.
- The property must be used more than 50% for business purposes in the year placed in service. If business use drops to 50% or less during the recovery period, recapture rules apply.
2. Who Can Elect Section 179 Expensing
- Section 179 expensing is available to individuals, corporations, partnerships, and S corporations.
- Estates and trusts are not eligible to make the election.
- Noncorporate lessors generally cannot use Section 179 unless they meet specific requirements (e.g., the property is manufactured by the lessor or the lease term is less than 50% of the class life and certain expense thresholds are met).
3. Dollar Limitations and Phase-Out
- For tax years beginning after December 31, 2024 (i.e., 2025), the maximum Section 179 deduction is $2,500,000, and the phase-out threshold is $4,000,000.
- 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 the phase-out threshold.
4. Business Income Limitation
- The Section 179 deduction for any year 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 the income limitation may be carried forward to future years.
5. Special Rules
- Married individuals filing separately are treated as one taxpayer for purposes of the dollar and phase-out limits, unless they elect otherwise.
- Controlled groups (as defined by section 1563(a), but using a 50% test) are treated as a single taxpayer for the dollar limitation, and the limit must be allocated among group members.
- SUV Limitation: For certain SUVs, the maximum cost that may be expensed is subject to a lower cap ($31,300 for 2025, adjusted for inflation).
6. Election Procedure
- The election is made by specifying the items of Section 179 property and the portion of the cost to be expensed on the taxpayer’s timely filed tax return (including extensions) for the year the property is placed in service.
- The election may be revoked with respect to any property, but such revocation is irrevocable.
- The election must be made in the manner prescribed by the Secretary, typically on IRS Form 4562.
7. Recapture
- If, before the end of the property’s recovery period, the property is not used predominantly in a trade or business (i.e., business use drops to 50% or less), the taxpayer must recapture as ordinary income the excess of the Section 179 deduction over the depreciation that would have been allowable under MACRS.
8. Exclusions and Non-Qualifying Property
- Section 179 does not apply to:
- Property used predominantly outside the United States.
- 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 less than 6 months).
- Property acquired by gift, inheritance, or from related parties as defined in section 267 or 707(b).
9. Summary Table of When Section 179 Expensing is Allowed
In summary: The IRS allows taxpayers to utilize Section 179 expensing for eligible property that is acquired by purchase for use in the active conduct of a trade or business, placed in service during the tax year, and used more than 50% for business purposes. The deduction is subject to annual dollar and business income limitations, and the election must be made on a timely filed tax return. Special rules apply to certain vehicles, controlled groups, and noncorporate lessors. Recapture is required if the property ceases to be used predominantly in a trade or business before the end of its recovery period.
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