Electing First-Year Expensing

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.

This means, if you purchase property in one year then place it in service in the following year, you may not deduct first-year expensing for that property in either 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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