In the year the property is placed into service, farmers can choose to recover some or all the cost of certain property up to a defined limit. This election is known as a section 179 expense deduction. The section 179 expense deduction is taken instead of depreciating the asset over its useful life.
Following is an overview of how much you can deduct for property under section 179 expense. Section 179 Expense Deduction, Part 1 covered what property qualifies for this expense deduction.
How Much Can You Deduct Under Section 179?
The amount of your section 179 expense deduction is typically the amount you paid for the property. However, the amount you can deduct is subject to a dollar limit and a business income limit. If you deduct only a portion of the cost of qualifying property under this section, you can typically depreciate the remaining amount over the life of the property.
For purposes of determining the amount you paid for property, if you paid for property with cash and the trade of other property, the value of the property for purposes of section 179 is only the amount of cash you paid.
In addition, if the qualifying property is used for both business and non-business purposes, you can choose to use the section 179 expense reduction only if you use the property more than 50% of the time for business during the year the property is placed into the service. If you use the property more than 50% of the time for business, you can deduct for section 179 expense purposes only the percentage of the property value related to business use.
The amount you can deduct under section 179 varies by tax year. For property placed into service in 2016, the limit is $500,000. If you acquire and place into service more than one piece of qualifying property, you can choose how you allocate the section 179 deduction expense between the properties. You cannot carry amounts over $500,000 over to future tax years for section 179 deduction.
If the cost of qualifying properties placed into service in 2016 is greater than $2,010,000, you must reduce the $500,000 limit by the amount over $2,010,000. Therefore, if the cost of section 179 property placed into service in 2016 is $2,510,000 or more, you cannot take a section 179 deduction for that property. Instead, you must depreciate the property over its useful life.
There is an additional dollar limit for certain sport utility vehicles. For any four-wheeled vehicle placed into service in 2016 and weighing between 6,000 and 14,000 pounds, the section 179 expense deduction is limited to $25,000.
If you are married, the expense deduction dollar limit is still $2,010,000, whether you and your spouse file a joint return or separate returns.
Business Income Limit
The total cost you can deduct under section 179 after applying the dollar limit is limited to the taxable income from any farming trade or business during the tax year in which you actively participate. Any cost not deducted because it is over the business income limit can be carried forward and taken in a future tax year.
Taxable income is the difference between net income and losses for any sole proprietorship, partnership, S corporation, as well as any section 1231 gain, interest from working capital, and wages, salaries, tips, or other pay earned by you or your spouse. When calculating taxable income, do not reduce the income by any section 179 expense deduction, self-employment tax deduction, or net operating loss carryback or carryforward.
This carry forward is available for an unlimited number of years. However, the carry forward amount is likewise subject to the business income limit in each tax year.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.