Increase in Section 179 Expensing
Small businesses can take advantage of
the election under section 179 of the tax code to expense
the cost of depreciable assets in the year of acquisition,
within tax law limits.
Under Section 179, a taxpayer may elect
to deduct, up to a dollar limit ($25,000, under pre-2003
Act law), the cost of qualifying property placed in service
during the tax year. The dollar amount is phased out dollar-for
dollar as the taxpayer’s cost of qualifying property
for the year exceeds $200,000. The amount that can be expensed
each year cannot exceed the taxpayer’s taxable income
derived from the active conduct of trade or business for
the year (without taking into account the effect of Section
179). Thus, the expensing election is most beneficial to
profitable smaller businesses with sufficiently small annual
capital investments.
Property qualifying for the election must
generally be tangible personal property, like equipment,
vehicles, machinery, etc. Under pre 2003 Act law, off-the-shelf
computer software did not qualify.
The 2003 Act increases the maximum dollar
amount that may be deducted under Section 179 to $100,000
for property placed in service in tax years beginning in
2003, 2004, and 2005. In addition, for phase-out purposes,
the $200,000 annual investment limit described above rises
to $400,000 for property placed in service during those
years. The dollar limits will be indexed for annual inflation
for tax years beginning after 2003 and before 2006. And
off-the-shelf computer software qualities for the section
179 election, for tax years beginning in 2003, 2004, and
2005. After tax years that begin in 2005, the expensing
election rules go back to the way they were prior to the
2003 Act.
| |
Pre-2003 |
2003 Act
(2003-2005) |
Post-2003 Act |
| Limit on Expensed Property* |
$25,000 |
$100,000** |
$25,000 |
| Annual Phaseout Limit |
$200,000 |
$400,000** |
$200,000 |
*An additional $35,000
"Liberty Zone" expensing election is available
for property placed in service in the area of New York
City damaged by the September 11, 2001, terrorist attacks.
** To be adjusted for inflation for 2004 and 2005.
Source: NPI |
Example: In 2003, Corporation
A has taxable income of $150,000 (without considering Section
179). For the year, Corporation A makes asset purchases
consisting of $50,000 in computer hardware, $10,000 in off-the-shelf
computer software, $10,000 in office furniture, and $30,000
for a delivery van. Under the old law, Corporation A could
have made a Section 179 election for only $25,000 of the
purchases, with the $75,000 remainder subject to regular
depreciation rules (with bonus first-year depreciation available
for those assets that qualified). After the 2003 Act, Corporation
A may expense all of the asset purchases in the current
year, since the limit is now $100,000 and the company’s
taxable in come exceeds that figure.
The increased Section 179 election and
the newly expanded additional first-year depreciation bonus
can be a powerful combination when it comes to writing off
new asset purchases, especially given the significantly
higher Section 179 annual asset investment limit. The rules
can be tricky, however, so the advice of a professional
tax advisor is recommended.
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