Section 179 of the IRS Code provides the option for taxpayers to deduct the cost of some property as an expense, rather than capitalizing the asset then depreciating it over several years. Under the American Recovery and Reinvestment Act (ARRA), enacted in February 2009, the Section 179 special (“bonus”) depreciation allowance was extended through 2009 and the allowable deduction limits were increased for small businesses.

Under Section 179, small businesses can deduct up to $250,000 of the cost of qualifying property ($285,000 for Qualifying Enterprise Zone Property and Qualifying Renewal Community Property) put into use during 2009. Without the ARRA, the limit would have dropped to $133,000.

The purchased assets, which can be “pre-owned” (used), must be used at least 50% for the business and put into service within the tax year. Assets eligible for the special deduction include machinery, equipment, computers, furniture, vehicles and other property, but excludes land. If the deductions are not taken, the business can use accelerated depreciation to write-off the equipment. Furthermore, there are limitations to the deduction when the total cost of the property exceeds $800,000 and there is a “phase-out” provision that eliminates the deduction for larger businesses, keeping the benefit focused on small businesses.

Note: For 2009, businesses that exceed the $250,000 deduction limit can take “bonus depreciation” equal to 50% on the equipment costs that exceed the limit, then they can take the normal depreciation on the balance of the equipment value.

Note: For qualified Section 179 Gulf Opportunity (GO) Zone Property, qualified Section 179 Recovery Assistance Property, and qualified Section 179 Disaster Assistance Property, the maximum deduction is higher than the standard deduction for other section 179 property (see more information below).

Business Vehicle Depreciation Limits

For both 2008 and 2009, the maximum depreciation deduction (including the Section 179 deduction) for a passenger vehicle, that is not a truck or a van, used on a business put into service during the tax year is $2,960 ($10,960 for vehicles for which the Special Depreciation Allowance applies). The maximum depreciation deduction for a truck or van that qualifies $3,060 ($11,060 if the Special Depreciation Allowance applies). The limits are reduced for vehicles less than 100% for business purposes.

Qualifying Property

The following is a summary of Qualified Property under Section 179:

a. Tangible personal property:

• Machinery and equipment
• Property contained in or attached to a building (other than structural components), including refrigerators, display counters, office equipment, printing presses, testing equipment and signs
• Gasoline storage tanks and pumps at retail service stations
• Livestock, including horses, cattle, hogs, sheep, goats, mink and other furbearing animals

b. Other tangible property (except buildings and their structural components) used as:

• An integral part of manufacturing, production or extraction process
• Transportation, communications, electricity, gas, water or sewage disposal services
• A research facility used in conjunction with any of the activities in Section a (above)
• A bulk storage facility for commodities used in conjunction with any of the activities in Section a (above)

c. Single-purpose agricultural or horticultural structures (See IRS Publication 225, Chapter 7 for further information on these structures)

d. Storage facilities (except buildings and their structural components) used in conjunction with distributing petroleum or any primary petroleum product

e. Off-the-shelf computer software

Property that only produces income, including investment property, rental property (if renting property is not the main trade or business activity), and property that generates royalties, does not qualify for the Section 179 deductions.

Property used for both business and non-business purposes only qualifies for the Section 179 deduction if it is utilized more than 50% for business. If the property is used more than 50% for business, then the taxpayer should multiply the purchase cost times the percentage of business-usage to calculate the deductible amount.

Also, property that is inherited or received as a gift does not qualify for the deduction, as the property must be specifically purchased for use in the business. There are special rules for property acquired from relatives. The rules and procedures for property acquired by methods other than an outright purchase can be found in “How to Depreciate Property” (IRS Publication 946).

Special (“Bonus”) Depreciation Allowance

The Special “Bonus” Depreciation Allowance gives businesses the ability to deduct 50% of the purchase cost of qualifying property within the year it is put into service, after taking any Section 179 deduction, but before calculating the standard depreciation deduction.

Qualifying property includes:

• Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less
• Water utility property
• Off-the-shelf computer software
• Qualified leasehold improvement property

Qualified property must also meet all of the following tests.

• Qualified property must be acquired after December 31, 2007, and before January 1, 2009
• Qualified property must be put into service before January 1, 2010 (before January 1, 2011, for certain transportation property and certain property with a long production period)
• Original use of the property must begin after December 31, 2007

Property that does not qualify for special depreciation allowance includes the following.

• Property placed in service and disposed of in the same tax year

• Property converted from business use to personal use within the same tax year it is acquired. (Note: Property converted from personal use to business use within the same or later tax year may be qualified)
• Property that must depreciated under the Alternative Depreciation System (ADS)
• Specific types of property for which the Special Depreciation Allowance is not claime
• Certain restaurant property put into service after December 31, 2008
• Certain retail improvement property put into service after December 31, 2008
• Property for which certain credits are taken instead of the Bonus Depreciation Allowance

Special Depreciation Allowance for Specific Property Types

Businesses may be able to take an additional Special Depreciation Allowance for specific types of property. As with the Bonus Depreciation Allowance, businesses can deduct 50% of the purchase cost of qualifying property within the year it is put into service, after taking any Section 179 deduction, but before calculating the standard depreciation deduction. Additional information is available in “How to Depreciate Property” (IRS Publication 946).

These property types and qualifications are summarized below:

• Qualified Recovery Assistance Property: Acquired after May 4, 2007, and put into service in the Kansas disaster area
• Certain Qualified Property: Acquired after 2007 and put into service before 2010 (or before 2011 for certain property with a long production period and for certain aircraft)
• Qualified Reuse and Recycling Property: Acquired after August 31, 2008
• Qualified Cellulosic Biofuel Plant Property. Acquired and put into service October 3, 2008, and before 2013
• Qualified Disaster Assistance Property: Property put into service in Federally declared disaster areas after 2007

Additional information is available in relevant IRS publications, announcements and website. Businesses should also consult with CPAs, professional tax preparers or other tax professionals to determine their allowable Section 179 deductions.

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