First-year Expensing Deduction Restrictions and Limitations
You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
1. Business Use Must Exceed 50%:
To claim first-year expensing for qualified property, business use must exceed 50% in the first year the property is placed in service.
2. Placed In Service:
For this purpose, a car is placed in service when it is ready and available for a specifically assigned use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use.
Keep in mind, a car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business.
In 2014, you bought a new car and used it for personal purposes. In 2015, you began to use it for business. Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2015.
However, you can claim a regular MACRS depreciation deduction for the business use of the car starting in 2015. Using MACRS depreciation, you deduct part of the cost of the car over several years.
3. Deduction limited to Tangible Personal Property Purchased for Business Use - such as:
- A car or truck acquired from nonrelated parties
- Office equipment
- Off-the-shelf software
4. Maximum Expensing Deduction Limit for the Following Tax Years:
- 2015: $500,000 (made permanent via the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), passed by both the House and Senate and signed into law on 12/18/2015)
- 2014: $25,000 (reduced for this tax year)
- 2013: $500,000
- 2012: $500,000.
5. Annual Expensing Limit Reduced Dollar-for-Dollar for Purchases Exceeding the Following limits:
If purchases of qualified property exceed the following limits in any of the following tax years, the first-year expensing deduction must be reduced dollar-for-dollar by the excess amount:
- 2015: $2,000,000 (increased for this tax year)
- 2014: $200,000 (reduced for this tax year)
- 2013: $2,000,000
- 2012: $2,000,000
In 2015 you paid $2,010,000 on qualified property. The maximum first-year expensing deduction of $500,000 for 2015 must be reduced by $10,000 ($2,010,000,000 minus $2,000,000). Your maximum first-year expensing deduction for 2015 is $490,000 ($500,000 minus $10,000).
6. Maximum deduction in 2015 for heavy trucks, vans, and SUVs weight-rated over 6,000 pounds:
$25,000 is the maximum first-year expensing deduction for trucks, vans, and SUVs, weight-rated at over 6,000 pounds gross vehicle weight (fully loaded) but not more than 14,000 pounds.
This rule applies to any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits.
The $25,000 Section 179 limit does not apply to:
- A vehicle designed to seat more than nine persons behind the driver’s seat.
- A vehicle equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible directly from the passenger compartment, or
- A vehicle that 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.
7. Maximum Depreciation Deduction in 2015 for Passenger Cars:
If you elect to take the special depreciation allowance (bonus depreciation) for qualified passenger automobiles placed in service in 2015, the limit is $11,160 ($3,160 plus $8,000).
The allowance is an additional depreciation deduction for 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS).
The special depreciation allowance applies only for the first year the car is placed in service. To qualify for the allowance more than 50% of the use of the car must be in a qualified business use.
Your combined section 179 depreciation, special depreciation allowance (bonus depreciation), and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars of $11,160 ($3,160 if you elect not to claim the special depreciation allowance).
Trucks and Vans:
For 2015, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. A truck or van is a passenger automobile that is classified by the manufacturer as a truck or van and rated at 6,000 pounds gross vehicle weight or less.
For trucks and vans, the first-year limit is $11,460 ($3,460 if you elect not to claim the special depreciation allowance).
To be a qualified car (including trucks and vans) the car must meet all of the following tests:
- You purchased the car new on or after January 1, 2008, but only if no binding written contract to acquire the car existed before January 1, 2008
- You placed the car in service in your trade or business before January 1, 2016
- You used the car more than 50% in a qualified business use.
Election not to claim the special depreciation allowance:
You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. If you make this election, it applies to all 5-year property placed in service during the year.
To make this election, attach a statement to your timely filed return (including extensions) indicating the class of property (5-year for cars) for which you are making the election and that you are electing not to claim the special depreciation allowance for qualified property acquired on or after January 1, 2008.
8. Property Traded In:
If you trade-in property for other property, the cost eligible for first-year expensing is limited to the cash you paid. The adjusted basis of the property traded is not eligible.
You purchase a computer for $1,500 and use it 100% for business. You pay $1,000 cash and are allowed $500 for your old computer. Your first-year expensing is limited to $1,000.
9. Taxable Income Limitation:
The first-year expensing deduction may not exceed the net taxable income from all businesses you actively conduct.
Note that even wages from a job is considered a business you actively conduct for the purpose of figuring your taxable income limitation..
- You're a sole proprietor
- Your Schedule C net income is $30,000
- You also have a part-time job and earned W-2 wages of $5,000
- Your spouse has a job and earned W-2 wages of $20,000
The taxable income limitation for the first-year expensing deduction would take into account $55,000 ($30,000 net income from the business plus $25,000 in W-2 wages)..
You figure net income from active businesses without regard to the following items:
- The first-year expensing deduction
- The deduction for self-employment tax entered on Form 1040
- Any net operating loss carryback or carryforward
Net loss from all actively conducted businesses:
- If you have an overall net loss from all actively conducted businesses you may not claim an expensing deduction for that year.
Net taxable income less than cost of qualifying property:
- If overall net taxable income is less than the cost of qualifying property, the first-year expensing deduction is limited to net taxable income.
- However, the cost that exceeds overall net taxable income may be carried over to the next year and added to the annual expensing allowance for that year.
In 2015, your spouses wages form her job were $20,000. Your Schedule C net profit from your sole proprietorship was $80,000. In 2015 you purchased and placed in service qualified property costing $108,000.
- Your maximum deduction for 2015 is $100,000 (equal to your spouse's wages and your Schedule C net profit).
- You may carry over the remaining $8,000 to 2016 and add it to your first-year-expensing allowance for that year.
- Your carryover to 2016 is barred if you did not claim the first-year expensing deduction on your return for the year the property
was placed in service.
- You must complete the expensing section of Form 4562 for 2015 in order to get a carryover to 2016.
11. Accelerated MACRS Recapture:
If you dispose of property you depreciated using MACRS, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable.
12. Recapture of Section 179 Expense Deduction on Listed Property:
If you used listed property more than 50% in a qualified business use in the year you placed the property in service and used it 50% or less in a later year, you may have to recapture in the later year part of the section 179 expense deduction. Use Form 4797 to figure the recapture amount.
13. Residential Rental and Non-residential Rental Real Property:
There is no recapture for residential rental and nonresidential real property, unless that property is qualified property for which you claimed a special depreciation allowance (discussed earlier). For more information on depreciation recapture, see Pub. 946.
14. First-Year Expensing is Not Allowed for the Following:
- Structural components of buildings
- Furniture and refrigerators used in operating apartment buildings
- Property held for the production of income
- Property used 50% or less for business
Partial business use:
If you use your vehicle less than 100% for business you must allocate the deduction to business use.
- In 2015 you purchased and placed in service an SUV, weight-rated over 6,000 pounds but not more then 14,000 pounds.
- The cost of the vehicle was $40,000
- Business use was 75%
- Your depreciable basis is $30,000 (75% x $40,000)
You may deduct a first-year expensing deduction up to $25,000. The remaining $5,000 may be depreciated using accelerated MACRS or straight-line depreciation.
You can use one of the following methods to depreciate property:
- 200% declining balance method (200% DB) over a 5-year recovery period:
- (it switches to the straight-line method when that method produces an equal or greater deduction. The switch is built into the table).
- 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight-line method when that method produces an equal or greater deduction (the switch is built into the table).
- Straight-line method over a 5-year recovery period.
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- Return to the Business Deductions Table of Contents to find related links