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Example For 2014, if you are a sole proprietor in the 25 percent tax bracket, the net after-tax cost of buying a $50,000 piece of machinery is reduced to $37,500, if you elect to take the Section 179 expense deduction. |
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You normally can't take a current business deduction for the entire cost of a capital asset in the year you purchase it, because the asset's usefulness to your business will extend beyond the year of purchase. However, there is an important exception to this rule for small businesses.
A special tax provision allows you to elect to deduct the cost of qualifying business assets, up to $500,000 for 2010 through 2014. If you fully qualify for this deduction, known as the Section 179 expensing election, you can get what amounts to a significant, up-front reduction in the out-of-pocket cost of a needed piece of business equipment.
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What qualifies for the election? To qualify for Section 179 expense deduction, the property that you purchase must pass the following tests:
One common type of eligible property is tangible personal property: that is, property other than real estate that can be seen or touched, such as a typewriter, chair, or desk. Tangible property includes not only machinery and equipment, such as the items just mentioned. It also includes property that's in or attached to a building, but which isn't a structural component of the building. Some examples are refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. Gasoline storage tanks and pumps at retail service stations are also eligible for the expensing election. Not all tangible personal property is inanimate: it includes livestock, such horses, cattle, hogs, sheep, goats, as well as mink and other furbearing animals.
In addition, property that is not a building or a structural component of a building, but is an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; or a research or storage facility used in connection with any of these processes can qualify. It can also be a single-purpose livestock or horticultural structure, or a petroleum products storage facility that is not a building.
Off-the-shelf computer software placed in service in tax years beginning before 2015 qualifies for the Section 179 deduction. This refers to software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Qualifying software does not include any database or similar item unless it is in the public domain and is incidental to the operation of otherwise qualifying computer software.
An air conditioning or heating unit doesn't qualify, however. Neither does intangible property such as a patent, contract right, stock or bond, etc.
To qualify, the property must be something that you actively use in your business, for which a depreciation deduction would be allowed. Property used for investment or to obtain royalties is not eligible.
The property must have been purchased specifically for your business. It can be new or used, but property that you previously owned but recently converted to business use does not qualify. Also, property you acquired by gift or inheritance does not qualify, nor does property you acquired from related persons such as your spouse, child, parent, some other ancestor or descendent, or another business with common ownership.
The property must be used more than 50 percent for business. If you want to expense property that will be used partly for personal or family reasons (e.g., a home computer that you use for business about 75 percent of the time, and for personal use the other 25 percent of the time), you can expense only the portion of the property's tax basis that corresponds to its percentage of business use.
There are a few other details to be aware of, in regard to the expensing election:
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