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Electing First-Year Expensing

You begin to depreciate your property when you PLACE IT IN SERVICE for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.

What "Placed in Service" Means

The IRS says, you place property in service when it is both ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Keep in mind, even if you are not using the property, it is in service when it is ready and available for its specific use.

Here are some IRS examples:

Example 1.

Don bought a machine for his business. The machine was delivered last year. However, it was not installed and operational until this year. It is considered placed in service this year. If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year.

Example 2.

On April 6, Sue bought a house to use as residential rental property. She made several repairs and had it ready for rent on July 5. At that time, she began to advertise it for rent in the local newspaper. The house is considered placed in service in July when it was ready and available for rent. She can begin to depreciate it in July.

Example 3.

James is a building contractor who specializes in constructing office buildings. He bought a truck last year that had to be modified to lift materials to second-story levels. The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought.

Conversion to business use.

Property you purchase for personal use that is subsequently conveted to business use is not eligible for the section 179. For example, if you purcahsed a laptop for personal use in 2017 and converted it to business use in 2018, you may not claim the section 179 deduction for your laptop. However, it would be eligible for regular depreciation at the time of conversion to business use or if used in an income-producing activity.

Example.

You bought a home and used it as your personal home several years before you converted it to rental property. Although its specific use was personal and no depreciation was allowable, you can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time.

Idle Property

Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine.

Cost or Other Basis Fully Recovered

You stop depreciating property when you have fully recovered your cost or other basis. You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property.

Retired From Service

You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events:

  • You sell or exchange the property.
  • You convert the property to personal use.
  • You abandon the property.
  • You transfer the property to a supplies or scrap account.
  • The property is destroyed.

You must elect first-year expensing the first year qualified property it is both purchased and placed in service in the active conduct of a trade or business. Placed in service means, the property is both ready and available for a specific use in a tax year.

How to Claim the First-Year Expensing Deduction

You make your election to claim first-year expensing (Section 179 deduction) by filing Form 4562.

Report the assets for which the election applies in Part I of Form 4562 on the following lines.

  • Line 6 column a: Enter the description of the property.
  • Line 6 column b: Enter only the cost of the property that relates to business use.
    • For example, if you have qualified property costing $40,000 that you use 80% for business, only enter $32,000 (80% x $40,000)
  • Line 6 column c: Enter how much of the cost related to business use that you want to deduct. You're not required to deduct the full cost related to business use.
    • For example, of the $32,000 in the above example, you may elect to deduct the entire $32,000 or a lower amount, say, $20,000, as your first-year expensing deduction.
    • If you deduct less than the entire cost related to business use, you may deduct depreciation on the remaining basis under regular MACRS rules.
      • For example, if you claim the $20,000 as first-year expensing (in the above example), you may also deduct depreciation for the remaining basis of $12,000 ($32,000 minus $20,000) under regular MACRS rules.
        • GDS Depreciation system:
          • Use Part III, Section A, Line 17 or 18 for property placed in service before the current tax year.
          • Use Part II, Section B, starting at Line 19a, for assets placed in service in the current Year
        • ADS straight-line depreciation:
          • If you use ADS straight-line depreciation, use Part III, Section C.
          • Include assets placed in service during the current tax year.
        • Listed property: Use Part V.

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.

MACRS Recapture:

If you later dispose of property that 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 for the following items.

  • Any section 179 expense deduction claimed on the property,
  • Any special depreciation allowance available for the property (unless you elected not to claim it),
  • Any deduction under section 179B for capital costs incurred in complying with Environmental Protection Agency sulfur regulations,
  • Any deduction under section 179C for certain qualified refinery property, and
  • Any deduction under section 179D for certain energy efficient commercial building property.

Residential Rental and Nonresidential 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.

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