Section 179 Deduction

1. Section 179 Deduction

In another section, we learned that for tax purposes, the Tax Code requires the cost of an asset be depreciated (deducted) over a period of time if the asset is used for business or is income-producing property. You may recall we mentioned, “unless an exception applies.” Well, here we are at the first exception, AKA, the tax plot twist number one!

2. What Is a Section 179 Deduction?

Section 179 of the United States Internal Revenue Code allows a taxpayer to elect to deduct the cost of certain types of property as an expense, rather than being “capitalized” and depreciated. Let’s revisit our taxpayer, Sherry.

EXAMPLE

Sherry has a lucrative catering business. During 2022, she purchased a new computer for $3,000. She uses the computer exclusively for business. Per the Tax Code, Sherry will need to depreciate (deduct) the cost over a span of five years unless she elects to deduct the property using the Section 179 deduction.

The asset will still be reported on the Depreciation Worksheet but it will look a little different.

1. Sherry decides to elect the Section 179 expense for the full $3,000.

1. Sherry’s basis for depreciation is reduced to $0 because the Section 179 expense has been taken for the full amount.
2. Sherry’s depreciation deduction is $0.

The $3,000 will be carried to Schedule C (Form 1040), Part II, line 13.


But what happens to her basis if she deducts the entire amount? Sherry’s basis for depreciation is $0 and her adjusted basis will be $0. Put this knowledge in your back pocket for when we discuss the sale of business assets later.

What If...?
Sherry can elect to take the full amount or a partial amount of the cost. What if she wants to deduct a portion of the $3,000 to save more of the deduction for future years? Let’s pretend Sherry wants to elect $800 for the Section 179 expense.

1. Sherry is electing to deduct $800 under the Section 179 deduction.

1. Sherry has taken $800 under the 179 deduction, so her basis for depreciation is now $2,200 [$3,000 - $800 = $2,200].
2. Year one for 5-year property is 20%.
3. $2,200 × 20% = $440.

The $800 of Section 179 deduction and the depreciation deduction of $440 will carry to Schedule C (Form 1040), Part II, line 13.


Sherry’s basis for depreciation is now $2,200. She will then take the remaining $2,200 of depreciation deduction over the next five years. Looking forward, her deduction for the computer will be:

Tax Year	Percent of $2,200	Deduction
2023	32%	$704
2024	19.20%	$422
2025	11.52%	$253
2026	11.52%	$253
2027	5.76%	$127

Let’s say goodbye to Sherry for now, but don’t worry, she’ll be back later!

3. Is There a Limit for the Section 179 Deduction?

We are so glad you asked! For 2022, a taxpayer generally may elect to immediately deduct up to a total of $1,080,000 of the cost of certain property in the year the property is placed into service instead of recovering that amount through depreciation.

4. Eligible Property for Section 179

Eligible property includes new or used property purchased by the taxpayer for use in their trade or business. There are restrictions as to what property is eligible. For our purposes in this introductory tax course, the first two are the ones seen most often. The last four are a bit more complex and more research would be needed. Publication 946 would be a good start:

• Tangible business-use, personal property.
• Off-the-shelf computer software.
• Certain other tangible property (other than buildings or their structural components).
• Single-purpose agricultural or horticultural structures.
• Storage facilities used in connection with distributing petroleum and petroleum products (other than buildings and their structural components).
• Certain qualified Section 179 real property.

EXAMPLE

On May 19, 2022, Jim purchased a machine for use in his business for $100,000. He may, if he wishes, claim the §179 deduction for the whole cost in the year of purchase, or he may depreciate it and claim the expense over its useful life.

He may even split it, deducting part and depreciating the rest, if he likes.

The Section 179 deduction must be claimed in the year the asset is purchased. If an asset is first used by the taxpayer for any purpose for which depreciation is not allowed (such as for personal use), the §179 deduction will never be available to that taxpayer for that asset.

EXAMPLE

Rosalyn purchased a computer entirely for personal use in 2019. In 2022, she started using it for business purposes. She may not claim a §179 deduction for the computer, but she may begin depreciating it.

Continue reading for our tax plot twist number two!