ALTB 04-01 Internal Revenue Code §179 Expensing
Taxpayers who have a farm or business have been allowed to claim a first year tax deduction up to
$24,000 on qualifying purchases, e.g., of machinery and equipment. This deduction reduces the basis
in the asset for purposes of regular depreciation. The Jobs and Growth Tax Relief Reconciliation Act
of 2003 increased this deduction to $100,000 for tax years 2003 - 2005. The deductions will be reduced
to $25,000 in 2006. The rules governing §179 are discussed in this article, using primarily agricultural
Taxpayers who are in a trade or business may elect to expense up to $100,000 of qualifying purchases
in 2003 through 2006 if they meet certain conditions.
The taxpayer may not expense an amount greater than the net income from their business plus any earned
income from other sources. The taxpayer is further limited to $100,000 of IRC §179 deduction.
If filing separately, one taxpayer may take a disproportionate share of the deduction with written
permission of the spouse.
Example 1 In 2003, Tom is an active farmer and has a net farm
profit of $70,000 before any §179 depreciation. His wife Mary has a part-time craft business
which reports a loss of $5,000 and she also works at the local WalMart where she has a gross income
of $15,000. Tom and Mary are limited to a total §179 deduction of $80,000 if they have at least
that amount of qualifying purchases.
The deduction becomes limited if the taxpayer has over $400,000 of qualifying purchases during the year
and is completely phased-out at $500,000 of purchases.
Example 2 Assume Tom and Mary had $470,000 of eligible purchases
in 2003. Their §179 deduction will be limited to $30,000 calculated as follows:
If their total purchases had been $420,000 or less, they could have taken a $80,000 deduction.
Entities are also allowed the §179 deduction. The dollar limit is determined
at the entity level. Therefore, a partnership or S corporation is limited to a $100,000 deduction,
regardless of the number of partners or shareholders involved. Since these two entities do not pay
income tax, the deduction passes through to the partner or shareholder where it is further limited
based on their individual income.
Example 3 ABC Partnership has three equal partners, A, B, and
C. If the partnership has a $30,000 profit, it is limited to a $30,000 §179 deduction. Each partner
will receive $10,000 of the deduction and $10,000 of pass-through profit.
Example 4 Assume the same facts as Example 3
except Partner B has already used $95,000 of §179 deductions from purchases made by his sole
proprietor business. Since he is personally limited to a $100,000 deduction, he will only want to
elect to expense $90,000 of purchases from his business. If B has excess-pass through §179 deductions
they are lost.
Example 5 Assume the same facts as Example 3
except Partner C has a $6,000 loss from his sole proprietor business. When the $6,000 loss is combined
with the $10,000 partnership pass through gain, he has net eligible income of $4,000. Therefore, he
is limited to a $4,000 §179 deduction. The remaining §179 deduction of $6,000 will be lost.
Any §179 deduction from eligible purchases in a partner’s sole proprietor
business can be carried forward.
The following property qualifies for the IRC §179 deduction:
1. Tangible personal property.
2. Other tangible property (except buildings
and their structural components) used as:
a. An integral part of manufacturing,
production, or extraction or of furnishing
transportation, communications, electricity,
gas, water, or sewage disposal services.
b. A research facility used in connection
with any of the activities listed previously, or
c. A facility used in connection with
any of those activities for the bulk storage of fungible
3. Single purpose agricultural (livestock)
or horticultural structures.
4. Storage facilities (except buildings
and their structural components) used in connection
with distributing petroleum or any primary
product of petroleum.
Tangible personal property is any tangible property that
is not real property. It includes the following property:
1. Machinery and equipment.
2. Property contained in or attached
to a building (other than structural components), such
as refrigerators, grocery store counters,
office equipment, printing presses, testing
equipment, and signs.
3. Gasoline storage tanks and pumps
at retail service stations.
4. Breeding livestock, including horses,
cattle, hogs, sheep, goats, mink, and other
Note. Land and land improvements, such as buildings and other
permanent structures and their components, are real property, not personal property. Land improvements
include swimming pools, paved parking areas, wharfs, docks, bridges, and fences. However, agricultural
fences and drainage tile do qualify for IRC §179, as do single purpose agricultural or horticultural
Certain types of property do not qualify for the §179 deduction, such as:
1. Certain property leased to others,
2. Certain property used predominantly
to furnish lodging or in connection with the
furnishing of lodging
3. Air conditioning or heating units
4. Property used predominantly outside
the United States (except property described in
IRC §168(g)(4) —commercial
airliners, ships, containers, etc.)
These non-qualifying property types are not normally found on farm and ranch tax
Timing of the IRC §179 Election
The election must be made on the first tax return filed after the taxable year to which the election
applied. It does not matter if the return is timely filed, however, a taxpayer can only amend a return
to claim the election if the amended return is filed within the time limit for filing the original
return plus extensions.
Example 6 Kevin is a calendar year tax filer. His 2003 tax return
is due no later than April 15, 2004, but he may file for up to a six months extension. Therefore,
the last date for Kevin to file his 2003 return is October 15, 2004. Assuming Kevin does not file
by this time, he can still claim the §179 deduction when he files.
Example 7 Horace timely files his 2003 return on April 15, 2004.
He later wishes to claim a §179 deduction. The last date Horace may claim the deduction on an
amended return is October 15, 2004. When Horace files his amended return he must write “Filed
pursuant to section 301.9100-2” on the amended return.
Tax Planning Using the IRC §179 Deduction
From a tax-planning standpoint, many variables have to be taken into account to determine if the election
of the IRC §179 deduction is appropriate to a specific taxpayer. Some of the more common planning
• Marginal tax bracket of the
• Profitability of the business
and availability of other income to satisfy the taxable
• Future marginal tax rates of
• Other asset acquisitions during
• Status of estimated tax payments
made for the current year.
• Does the client need the asset
for the business, or is the acquisition more tax
• Will the subject asset(s) be
sold or traded in later years?
• Did the taxpayer purchase both
shorter use-life and longer use-life assets?
• IRC §179 deduction used
as an effective means to reduce possible vulnerability to
repair versus capital improvement issues
with the IRS.
• Allocation of IRC §179
from other entities.
• Use of IRC §179 and its
impact on social security benefits.
Related Article Click here
to view an article regarding the 30%/50% special depreciation allowance.
Related Article Click here to view an article
regarding the combined use of the §179 deduction and the 50% special depreciation allowance.