A true reality of keeping a business running is the ongoing purchase of equipment throughout the year, year after year. Fortunately, Section 179 (depreciation expense election) is designed to make purchasing that equipment financially attractive during the calendar year. With the increased importance of the Section 179 deduction—permanently $500,000 for federal tax purposes—the following can serve as a quick reference when determining eligibility:
Annual Dollar Limit
This limit ($500,000 for federal tax purposes) applies separately at the 1065 (partnership) or 1120S (S Corporation) level, as well as the 1040 (individual) level. A $25,000 limit applies for SUVs with a gross vehicle weight rate (GVWR) over 6,000 pounds.
Asset Addition Phase-Out Limit
A Section 179 deduction phases out dollar-for-dollar as eligible asset purchases exceed $2 million. Asset additions inside pass-through entities (partnerships and S Corporations) do not count against the asset addition limit of an owner of the entity.
Taxable Income Limit
A Section 179 deduction cannot exceed the taxable income derived from active businesses such as a farming operation. This limit applies at the entity level—1065 or 1120S—as well as at the 1040 level. In addition to active businesses, business income also includes Section 1231 gains/losses, Section 1245/1250 depreciation recapture income, interest income from working capital of a business, wage income and actively managed rental property. Both spouses count as one in a joint individual tax return for this test. Any Section 179 deduction limited by business taxable income becomes a carry-forward to the next taxable year.
These include property subject to Section 1245 depreciation recapture (i.e., generally assets with tax depreciation lives of 15 years or less). When property is acquired via a trade-in, only the cash paid or boot counts as being eligible for Section 179. Additionally, the asset must be more than 50% used in an active trade or business.
- Asset acquired from a related party (spouse, lineal descendant or ancestor and a more than 50% controlled entity)
- Purchases by an estate or trust
- Property used in the furnishing of lodging, except for hotel operations. This precludes purchases used in connection with corporate-provided farm employee lodging.
- Property leased to others under the non-corporate lessor rules, unless:
- The term of the lease is less than 50% of the class life of the property (typically 10 years for agriculture equipment); and
- During the first 12 months of the lease, the deductions to the lessor with respect to the property exceed 15% of the rental income produced by the property.
Examples of Qualifying Farm Assets for Section 179 Deductions:
- Water wells (15 yr.)
- Drainage facilities (15 yr.)
- Single purpose agricultural structures and horticultural structures (10 yr.)
- Vines and orchards (10 yr.)
- Grain bins (7 yr.)
- Farm machinery and equipment (7 yr.)
- Fences (7 yr.)
- Office furniture and fixtures (7 yr.)
- Computer, calculators and copiers (5 yr.)
- Dairy or breeding cattle (5 yr.)
- Trucks and automobiles (5 yr.), but beware of depreciation caps on vehicles under 6,000 lbs.
- Hogs – breeding (3 yr.)
- Tractor units – over the road (3 yr.)
- Milking parlors (10 yr.)
- Potato, apple, onion, etc. refrigerated storage (7 yr.)
- Controlled atmosphere storage (7 yr.)