Make sure you make the election
when you file your original income tax return for that year. You can't
later amend your return to elect Section 179. The only exception to this
is if you amend your return before the actual due date, including
extensions, of your original return.
For example, the maximum extended
due date to file your return is Oct. 15. You file your return on Sept. 1
and then realize you didn't utilize the Section 179 deduction. You still
have until the Oct. 15 deadline to file an amended tax return to claim
the deduction.
Maximum
Section 179 deduction increased
Congress periodically reviews the amount a taxpayer can claim as the
annual Section 179 amount. As part of an economic stimulus and
tax-reduction package signed into law in May 2003, the expense limit was
hiked to $100,000.
Lawmakers upped the immediate
deduction amount in the hopes it would encourage businesses to invest in
new equipment sooner. The bigger deduction is available for tax years
2003, 2004 and 2005.
Any amount of property over the
maximum deduction must be depreciated.
Limitation on
annual amount of property purchased
There also is a limit on the annual total of deductible property. If the
cost of qualifying Section 179 property you put into service in a single
tax year (2003 through 2005) now exceeds $400,000 then you can't take
the full deduction.
For every dollar above $400,000
that a business owner spends on eligible property, he loses a dollar in
deductions. For example, the manufacturer completely re-equipped his
facility at a cost of $407,000. This is $7,000 more than allowed, so he
must reduce his eligible deductible limit to $93,000: $100,000 minus
$7,000.
The limitation amount will be
indexed in 2004 and 2005 to reflect the inflation rate.
Deduction
limited to taxable income
You have now determined the maximum deduction based on the amount of
property purchased during the year. You now must pass the aggregate
income hurdle.
Your deduction is limited to your
aggregate taxable income from the active conduct of any trade or
business. Active trade or business includes employee and spouse's wages,
sole proprietorships, partnerships and S corporations. Basically, this
means that unless you have other sources of business income, your
Section 179 deduction can't create a taxable loss for your business.
More business owners are able to
take advantage of the deduction when they combine their company earnings
with those of a spouse or money earned in addition to (or before
starting) their own company income.
For example, you are someone else's
employee for most of the year. Your wages exceed the Section 179
deduction. You start your own business at the end of the year and
purchase equipment and furniture. Even if your new business doesn't
generate gross income that year, you can still take the Section 179
deduction on the new equipment and furniture. Why? Your wages exceed the
Section 179 deduction.
This aspect of inclusion also
applies to a spouse. For example, you earn annual wages of $60,000 as an
employee. Your spouse doesn't work during the year but begins a new
business at the end of the year. Your spouse purchases and places in
service $15,000 of Section 179 property at the end of the year. Your
spouse's business doesn't generate gross income at the end of the year.
Even though your spouse hasn't earned trade or business income for the
year, the Section 179 deduction of $15,000 is still allowed in full
since your wages count as trade or business income.
Any amounts disallowed by the trade
or business taxable income limit are carried over to the next year and
added to the cost of any eligible property placed in service in that
year. The same rules for maximum deduction, maximum annual investment
and taxable income apply to the next tax year as well. .
Conclusion
The tax tip explains the process for using Section 179 to fully expense
certain business expenses immediately instead of depreciating them
across a period of several years. You should also be aware of less
obvious advantages of the Section 179 deduction:
