Here is a good summary of section 179. It looks like the authors are not optimistic about a $250,000 and a 50% bonus continuation to 2010. In addition to the following memo, check out this attachment: Section 179 Eligibility Checklist.
What Year Is an Asset Eligible for IRC Section 179 Expensing?
As accountants advising businesses who report for tax purposes under the cash method of accounting, each year we receive a flurry of questions regarding last minute transactions. This year was no exception and this release is a reminder to all of us of the rules regarding what it takes to claim a Section 179 deduction for fixed assets purchased in the year. The asset must be purchased and placed into service during the tax year to be eligible for the Section 179 Election to Expense.
Background
Congress has used Section 179 for economic stimulus purposes, often with dramatically different results from year to year. The timing of an asset’s eligibility not only affects the year of deduction, but also the amount. In view of the apparent decrease in the Section 179 limit, it’s appropriate to review the issues that affect eligibility and timing of Section 179 deductions.
2009 and 2010 Section 179 Deduction Limits
As we know, the Economic Stimulus legislation continued the expanded Section 179 deduction of $250,000 for years beginning in 2009. For tax years beginning in 2010, the limit has dropped to $134,000 (this is the 2007 limit of $125,000 indexed for inflation). In addition, the asset addition phase-out range drops back to $530,000 - $664,000 in 2010 (Rev. Proc. 2009-50).
Caution: Congress could choose to retroactively restore the expanded Section 179 deduction and 50% bonus depreciation for one more year. But at this point, with signs of economic activity improving and the draft of the 2010 “extender bill” omitting these provisions, it appears both of these depreciation incentives will be allowed to expire.
Be aware that a fiscal year pass-through entity would be eligible to claim up to $250,000 for its year ending in 2010. However, the individual 1040 reporting the pass-through Section 179 will be limited to $134,000. Any excess is a wasted deduction that is neither allowed in 2010 nor is a suspended deduction. There is no carryover provision for a Section 179 deduction that is in excess of the individual’s Section 179 dollar limit (Rev. Proc. 2008-54, Example 3).
As a quick reference to the many rules affecting this provision, we have attached an updated Section 179 Eligibility Checklist.
When Is a New Fixed Asset Purchase Eligible for the Election?
Two portions of IRC Section 179 determine the proper tax year for the deduction:
1. According to IRC Section 179(d)(1)(C), property is eligible for the first-year deduction only if it is purchased. “Purchased” means that the taxpayer has either paid for the asset or has a legal liability for the purchase of the asset.
2. According to IRC Section 179(a), the deduction is allowed for the year in which the property is placed in service. The asset has to be available to the taxpayer for its intended business use to qualify as being placed in service.
Both tests must be met for the asset to be eligible. The following examples illustrate these rules.
Example 1 – Section 179 Deduction in 2010
Tim Farmer had a long crop harvesting season this past fall. Since harvest is over, he has reviewed his operation and decided that a new grain dryer would speed up his harvesting operation and allow for a more timely harvest of his corn crop. The grain handling companies which sell crop dryers have pricing specials which end on December 31st.
If Tim writes a check for the dryer purchase on or before December 31st, he has met the purchase requirement for the Section 179 depreciation deduction. However, if the dryer will be manufactured in spring of the next year and delivered to Tim’s farm site in the summer of 2010, he has not met the placed-in-service requirement. Therefore, even though Tim has paid for the dryer during 2009, it is not eligible for depreciation or the Section 179 deduction until 2010, and a $134,000 Section 179 limit applies.
Example 2 – Section 179 Deduction in 2009
Assume the same facts as Example 1, except Tim buys and pays for a used portable grain dryer that is sitting on the dealer’s lot in December. If Tim has the dryer delivered and placed into his grain handling system so that it is available to dry corn before December 31st, then the dryer has been placed in service and it is available for his use. In this situation, Tim is eligible for the Section 179 deduction for the dryer even though he does not use it to dry corn until much later in the following tax year.
Example 3 – Section 179 Deduction in 2008
Jim Lately made the decision that a new combine would improve his farming operation during 2008. The equipment manufacturer had a promotional deal for no down payment and no interest until the following year on the purchase of this new model. Jim completed the paperwork to purchase the combine in September of 2008 and used it in his harvest during the fall of 2008. Jim had a legal liability to the equipment manufacturer’s finance division as of the purchase date in 2008, even though he did not expend any cash for the purchase of the combine that year.
In compiling his 2008 tax data, Jim overlooked the loan paperwork and did not mention to his tax preparer that he purchased the combine. In the preparation of his 2009 tax return, Jim and his tax preparer notice the first payments on the combine and recognize the oversight. According to the two eligibility tests, Jim did have a purchase during 2008 and the asset was placed in service during 2008. Therefore, the Section 179 election for the combine may only be made in his 2008 tax return (via the filing of an amended return). Jim is not eligible to make a 179 election in his 2009 return for this combine.
Glen Steiner and Rick Christiansen
