Resources

Articles & Tips

Tax Tidbit 10/07: Election To Expense Business Assets

Despite generous long-term benefits from accelerated methods for depreciating assets, many small and medium sized businesses find it difficult to come up with the cash necessary to purchase new assets to improve their operations.  Fortunately, many businesses have a significant window of opportunity. This option is called a Section 179 election.   

The election is available whether one operates as a sole proprietorship, corporation or partnership.  The election is generally available for tangible property used in a trade or business that is depreciable, provided it is personal property (i.e. not land, buildings, or structural fixtures) and is purchased (i.e. not received by gift or inheritance). 

The election to expense must be made by the due date of the return for the tax year in which the property is "placed in service," and is made on Form 4562, Depreciation and Amortization, which is attached to the tax return. This election is subject to two limitations. First, the election cannot exceed the income from the business.  However, any amount disallowed under this limitation may be carried forward to a subsequent year.  Second, the maximum deduction available for any particular year is generally limited to a set statutory figure ($100,000 for the 2003-2009 period; $25,000 for years thereafter). However, this amount is reduced on a dollar-for-dollar basis if the cost of qualifying assets during the year exceeds $400,000 (inflation adjusted).  Also, basis is reduced by the expensed amount for depreciation taken during that year and future years for the life of the asset.

The maximum deduction and the phase-out are indexed for inflation. For 2006, the deduction limit was $108,000 and the phase-out began when income exceeded $430,000.  For 2007, the limit increased to $125,000, and the phase-out begins at $500,000. 

Making a Section 179 election makes a lot of sense for many businesses, especially for the 2003-2009 periods during which the enhanced $100,000 inflation-adjusted annual limit applies.