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 a dollar limit, a limit based upon total eligible property acquired during the year, and a business income limit.

Dollar Limit. For 2010 and 2011, you can expense up to $500,000 of the cost of eligible property. 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 purchase new computers for your business and you have 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. 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 2010 and 2011. 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 2010 and 2011, 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.

Work Smart If you are contemplating major equipment purchases, you would be well advised to make them during 2010 and 2011 if at all possible. Although the generous limitations have been extended and re-extended by Congress in recent years, this may not continue to hold true. Without further extension, the dollar limitation will drop from $500,000 all the way to down to only $25,000 in 2012! The total cost of assets limit will drop from $2 million to $200,000.

Equipment over the limit. If you purchased equipment that exceeds the $500,000 limit, or if you claim more than the maximum dollar amount, you can depreciate the excess amount under the usual rules.

Example Say that you purchased a full suite of office furniture and equipment for $258,000 in 2010, and this was your only capital expense for the year. You could expense $250,000 of the cost in 2010, which would leave a remaining balance of $8,000. You could then depreciate the $8,000 over seven years, yielding a 2010 depreciation deduction of $1,142.86. Your total write-off for the furniture in 2010 would be $250,000 + $1,142.86 = $251,142.86.

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 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 $3,060 ($3,160 for trucks and vans) in 2010 (this amount is adjusted periodically because of inflation). For 2009 only, 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 $11,060 in 2010 ($11,160 for trucks and vans).

Special rules for SUVs. A well-publicized tax break once allowed taxpayers who purchased a truck or van with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds to deduct more than $100,000 of the vehicle's cost in the year of purchase assuming that the vehicle is used 100 percent for business purposes. A sport utility vehicle (SUV) built on a truck chassis would qualify for this purpose.

However, the American Jobs Creation Act of 2004 limits the cost of an SUV that may be expensed in the first year to $25,000. The reduced limit applies to vehicles placed in service after October 22, 2004.

Although this infamous tax loophole is smaller, the new law does not eliminate the exemption from the luxury car depreciation limitations for SUVs that have a GVWR in excess of 6,000 pounds. It simply prevents a taxpayer from expensing the maximum amount otherwise allowable under the expensing election.

Owners of heavy SUVs will still be able to claim a significantly higher first-year depreciation deduction than owners of lighter vehicles. A taxpayer may also still purchase a pick-up truck with a GVWR in excess of 6,000 pounds and expense the entire cost, assuming 100 percent business use.

In addition, the term "sport utility vehicle" and, thus, the new $25,000 limit, does not apply to any vehicle that:

• is designed to have a seating capacity of more than nine persons behind the driver's seat,
• is equipped with a cargo area of at least six feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or
• has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

Increased deductions for Hurricane Katrina replacement property. The Gulf Opportunity Zone Act of 2005 increased the expensing limitation by the lesser of $100,000, or the cost of qualified Code Sec. 179 Katrina Go Zone property. It also increased the investment limitation by the lesser of $600,000, or the cost of qualified Code Sec. 179 Katrina GO Zone property placed in service during the tax year. Property purchased on or after August 28, 2005, and placed in service on or before December 31, 2007, qualified.

The availability of the increased expensing election deduction for qualified Gulf Opportunity Zone property was extended for an additional year, so that the increased deduction could be taken with respect to property placed in service in tax years beginning in 2008. However, the extension only applied for property "substantially all of the use of which is in one or more specified portions of the GO Zone." The specified portions of the GO Zone are those counties or parishes in which the 2005 hurricanes damaged more than 60 percent of the occupied housing units. These are the Louisiana parishes of Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany, and Washington, and the Mississippi counties of Hancock, Harrison, Jackson, Pearl River, and Stone.

Warning For the increased limits to apply, the property must be both section 179 property and qualified Gulf Opportunity Zone property. To qualify as section 179 property, the property must be new or used tangible property that is depreciable under MACRS (subject to an exception for off-the-shelf computer software) and used predominantly (more than 50 percent) in the active conduct of a trade or business. In addition, the property must be acquired by "purchase" from an unrelated person. Certain qualified Gulf Opportunity Zone property, most notably, residential rental and nonresidential real property and certain used property will not qualify for the increased allowance because it is not also section 179 property.