Articles

2013 Section 179 Deduction Rules

Jun 26, 2013

The general rules for the Section 179 Deduction are outlined below.  Businesses should be aware of these rules as they plan for and invest in fixed assets in 2013 and later years.  This summary discusses the general rules for the Section 179 Deduction.  Additional rules that apply specifically to claiming the Section 179 Deduction for autos and trucks are not outlined here.  Please consult with the tax professionals at Gilliam Coble & Moser, L.L.P. to determine how these rules may benefit your unique situation. 

For purchases of qualifying business property placed in service during the tax year that begins in 2013, a “Section 179 Deduction” of up to $500,000 may be taken on these purchases.  To qualify for the deduction, the business property must be “tangible personal” property.  This means that real estate (buildings and their structural components) does not qualify, nor do intangibles such as patent rights.  However, for tax years beginning in 2013, off-the-shelf computer software also qualifies.

The depreciable basis of an asset that the deduction is taken on must be reduced by the amount of the deduction taken.

Unlike bonus depreciation, the Section 179 deduction may be taken on used assets.

Phase out

  • The deduction is reduced dollar for dollar for personal property purchases that exceed $2,000,000 during the tax year. 
  • Therefore, the deduction is completely phased out if purchases exceed $2,500,000 during the tax year.

Limitations

  • The Section 179 deduction generally cannot exceed taxable income for the year (before the deduction). 
  • However, for a pass-through entity, taxable income can be calculated before deducting any wages paid to S corporation shareholders owning 2% or more of the S corporation stock or guaranteed payments paid to partners in a partnership.

Double limitations for pass-through owners

  • Not only do the above limitations and phase outs discussed above have to be applied at the entity level, but for pass-through owners, the limitations and phase outs must also be applied at the individual level. 
  • Therefore, even if the pass-through entity had sufficient taxable income to take a Section 179 deduction on purchases of less than $2,500,000, the pass-through owner’s deduction may be limited if losses from another business would cause taxable income to drop below the amount of the Section 179 deduction or if additional purchases would cause the individual taxpayer to exceed the $2,500,000 phase out. 
  • Any amount that the individual taxpayer cannot deduct because of taxable income limitations may be carried forward indefinitely.  However, any deduction amount limited because it exceeds the $2,000,000 phase out may not be carried forward and is lost.
  • In addition, a Section 179 deduction may be limited due to a Section 179 deduction claimed by a spouse.  Married taxpayers are treated as one taxpayer for purposes of the phase outs and the dollar limitations, whether or not they file joint returns.  A husband and wife cannot deduct more than a total of the applicable maximum deduction, even if they each bought separate properties and each owns separate businesses.  Also, their deduction is limited if together their purchases exceed the annual phase-out amount.