Despite generous long-term benefits from accelerated methods for depreciating assets, many small and medium sized businesses find it difficult to come up with the cash necessary to purchase new assets to improve their operations. Fortunately, many businesses have the option of taking an immediate write off in the year of purchase for $500,000 in 2012 and 2013. This option is called a Section 179 election.
Who Is Eligible to Make the Election?
All taxpayers other than estates, trusts, and specified noncorporate lessors may make a Section 179 election. Therefore, the election is available whether one operates as a sole proprietorship, corporation, or partnership.
What Type of Property Is Eligible for the Election?
The election is generally available for tangible property that is depreciable provided it is personal property (i.e., not land, buildings, or structural fixtures), and purchased (i.e., not received by gift or inheritance). However, the election cannot be made if the property is purchased from a related party. The property also must be used in a trade or business. Tangible property does not include items such as goodwill, films, videotapes or sound recording, and most software.
When and How Is the Election Made?
The election to expense must be made by the due date of the return for the tax year in which the property is “placed in service” on Form 4562, Depreciation and Amortization, which is attached to the tax return. Also, the election may not be revoked unless the IRS consents.
What Is the Maximum Available Deduction?
This election is subject to two limitations. First, the election cannot exceed the income from the business, yet, any amount disallowed under this limitation may be carried forward to a subsequent year. Second, the maximum deduction available for any particular year is generally limited to a set statutory figure ($500,000 for 2012 and 2013). However, this amount is reduced on a dollar-for-dollar basis if the cost of qualifying assets during the year exceeds $2 million. Also, basis is reduced by the expensed amount.
What If I Do Business in an Empowerment Zone?
Special rules apply for proprietorships, partnerships and corporations that meet detailed enterprise zone business, renewal property, New York Liberty zone property and Gulf Opportunity zone requirements. These qualified zone businesses may be eligible to deduct substantially more. If you believe that you are in an qualified zone, we can calculate how much extra your business will be able to deduct.
What Happens When the Property Is Sold?
For example, assume a taxpayer purchased some business equipment for $5,000 and elected to expense the entire $5,000 through Section 179. Then, four years later he sells the equipment for $2,000. Since the taxpayer’s basis in the equipment is zero, the entire amount of the selling price will be recognized as a gain.
As you can see, making a Section 179 election makes a lot of sense for many businesses. Please feel free to contact us at 770-429-9166 or experts@henssler.com if you have any questions as to how this election can be effectively used in your business. We will be glad to discuss the specific rules regarding making this election.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
