Annual Section 179 Deduction Limit

Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can elect to deduct under section 179 is subject to three limitations: an annual dollar limit, a annual limit based upon total eligible property acquired during the year, and a business income limit.

Dollar Limit. For 2014, you can expense up to $500,000 of the cost of eligible property (qualified leasehold, restaurant and retail improvements are limited to $250,000). If you acquire and place in service more than one item of qualifying property during the year, you can allocate your section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. However, you do not have to claim the full $500,000.

Save Money Unlike the depreciation deduction, the full expensing amount is available regardless of what month you put the property into service. Therefore, if you purchased new computers for your business and you had them up and running at any point during the year - even as late as December 31 - you are entitled to the same amount that you could claim if you'd put the computers into service in January. This makes purchasing new equipment a great year-end strategy for reducing your tax bill.

Total cost of all property--annual investment limit. The dollar limit must be reduced if the total cost of all eligible property exceeds a certain amount. For most small businesses, this limitation is not likely to have an impact on the available dollar amount because it is set at $2 million for 2014. If the cost of all eligible property exceeds $2 million, then the $500,000 dollar limit is reduced dollar-for-dollar for each dollar over $2 million. Thus, in 2014, the expensing election is not available for any property if the total cost of all eligible property acquired during the year exceeds $2,500,000.

Equipment over the limit. If you cannot expense the entire cost of property acquired during the year because of one or more of the three limitations, you can depreciate the amount that you can not expense using the appropriate depreciation conventions.

Save Money Generally speaking, where you have a choice, it's best to expense those assets with the longest depreciation periods (e.g., seven-year property), so you can claim a quicker write-off for them. If the asset has a shorter depreciation period (e.g., three-year property), expensing it in the first year is not going to make as much of a difference.

Special rules for cars. For many small business owners, the only time they would even approach the annual expensing limit would be the year they purchase a new car. But as fate (and Congress) would have it, there is a special rule that prevents you from deducting the full amount. Generally, for cars, the amount of depreciation, including the Section 179 deduction, that may be expensed the first year placed in service is limited to $3,160 ($3,460 for trucks and vans) in 2014 (this amount is adjusted periodically because of inflation). This is often referred to as the luxury car depreciation cap. For 2014, thanks to the economic stimulus legislation designed to encourage purchases, a bonus depreciation allowance of $8,000 can be used on business vehicles; this means the total deduction for cars will be $11,160 in 2014 ($11,460 for trucks and vans).

Special rules for SUVs. Sport utility vehicles (SUVs) and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds are exempt from the luxury car depreciation caps. However, no more than $25,000 of the cost of an SUV with a GVWR in excess of 6,000 pounds or a pickup truck in excess of 6,000 pounds GVWR with a bed length of less than six feet may be expensed under Code Sec. 179. This $25,000 limitation does not apply to bonus depreciation. If a 50 percent bonus rate applies, a taxpayer may expense up to $25,000 of the cost under Code Sec. 179, claim a 50 percent bonus deduction on the cost as reduced by the section 179 allowance, and then claim a regular first-year depreciation deduction equal to 20 percent of the cost as reduced by the section 179 deduction and 50 percent bonus allowance, assuming the 200 percent declining balance method and half-year convention are used to depreciate the vehicle.

© 2024 Wolters Kluwer. All Rights Reserved.