Rules for expensing Certain Depreciable Business Assets under Code Section 179.

Property that is new or used is eligible for expensing under Code Section 179 (if it is purchased for a trade or business), is depreciable under MACRS and is depreciable property as defined below.

Here are the following broad classifications of depreciable property:

Personal property

• Tangible property which does not include most buildings and their structural components and the
  property is used as an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; or is a research facility used in connection with these types of activities or is a facility that is used for the bulk storage of fungible commodities;

Single-purpose agricultural or horticultural buildings

• Storage facilities (other than their buildings and structural components) that are used in connection with the distribution of petroleum or primary products of petroleum.

Any railroad grading or tunnel bore

• Buildings and other permanent structures and their components that are real property do not qualify for expensing. Land improvements that include swimming pools, paved parking lots, wharves, docks, bridges, and fences. Property contained in or attached to a building such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs do qualify.

 

To qualify for expensing, property must be used more than 50 percent in the taxpayer's business. If a property is used more than 50 percent for business and also for investment purposes, the investment portion does not qualify for the expensing allowance.

Commercial facilities such as grocery stores and restaurants located within a lodging facility are not treated as lodging facilities if available to non-lodgers on the same basis as lodgers. Thus, property used within these facilities can qualify for the expense allowance. A similar rule applies to vending machines

 

The following property does not qualify for the Code Section 179 expense deduction:

• Property held for the production of income which is not used in a trade or business.
• Property used predominantly outside of the United States and property used predominantly to furnish lodging, or used predominantly in connection with furnishing lodging,
• Property used by certain tax-exempt organizations unless used in connection with the production of income subject to the tax on unrelated trade or business income.
• Property used by governments and foreign persons;
• Air conditioning units and heating units including space heaters.
• Apartment houses, hotels, motels, dormitories, or most other facilities or part of facilities where sleeping accommodations are provided. However, property used by a hotel, motel, inn, or other similar establishment is not considered used in connection with the furnishing of lodging if more than half of the living quarters are used to accommodate tenants on a transient basis (rental periods of 30 days or less)
• Property used in the living quarters of a lodging facility, including beds and other furniture, refrigerators, ranges, and other equipment is considered as used predominantly to furnish lodging.
• Property which is used predominantly in the operation of a lodging facility or in serving tenants is considered used in connection with the furnishing of lodging, whether furnished by the owner of the lodging facility or another person. Examples of property used in connection with the furnishing of lodging include lobby furniture, office equipment, and laundry and swimming pool equipment. Property used in furnishing electrical energy, water, sewage disposal services, gas, telephone service or similar services are not treated as used in connection with the furnishing of lodging.
• Rentals that are not a taxpayer's trade or business do not qualify for Section 179. Property may be expensed only if it is used in connection with the active conduct of a trade or business. IRS Publication 527 clearly states: "You cannot claim the section 179 deduction for property held to produce rental income (unless renting property is your trade or business)."
• Computer software that is depreciable over three years and is placed in service in tax years beginning in 2003, 2004, or 2005 may be expensed. Off-the-shelf computer software is software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified qualifies for the deduction. This temporary rule is an exception to the requirement that only tangible property which is depreciable under MACRS may be expensed.
• Animals used or slaughtered for use in the active conduct of a trade or business are eligible for the Section 179 deduction.. Animals include horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

Certain "purchases" do not qualify for the Section 179 deduction

• Property acquired from a person whose relationship to the taxpayer would result in a disallowance of loss on a transaction between the taxpayers.
• Any purchase modified for such purpose to restrict the definition of "family" to spouse, ancestors, and lineal descendants.
• Property acquired by one component member of a controlled group from another component member of the same group (using a more than 50 percent control test); or property the basis of which is determined in whole or in part (a) by reference to the adjusted basis of a transferor or (b) under the stepped-up basis rules for property acquired from a decedent.
• Property which is converted from personal use to business use by a taxpayer may not be expensed since it was not originally acquired by the taxpayer for use in a trade or business.

As with any tax matters, please consult with your local Certified Public Accountant.

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Bonus Depreciation

New Tax legislation - additional depreciation allowance rate was increased from 30 percent to 50 percent

Jobs and Growth Tax Relief Reconciliation Act of 2003;
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27) increases the first-year additional depreciation allowance from 30 percent to 50 percent. The 50 percent rate applies to property acquired after May 5, 2003, and placed in service before January 1, 2005. The previous requirement for acquisition before September 11, 2004 is eliminated.

Bonus depreciation is available only for new property. This restriction is for property initially purchased for personal use and then converted by the taxpayer for use in the taxpayer's trade or business. New property acquired by a taxpayer for personal use and then sold to a different taxpayer would not satisfy the new property requirement.

The 50-percent bonus depreciation property is the same type of property which qualified for 30-percent bonus depreciation.

Transportation Property or other property which has a recovery period of 10 years or longer can be placed in service before January 1, 2006 instead of May 5, 2003.

Written Binding Contracts are treated the same as purchases on the date the contract is entered into.

Purchasers may elect to use the 30% rate instead of the 50% rate on a property-class by property-class basis. Purchasers may also elect to opt out of both the 30% and 50% rate on the same basis.

Property which is constructed, manufactured, or produced for the taxpayers business use is changed from beginning before September 11, 2004 to January 1, 2005. Otherwise, the treatment for the 50% Bonus Depreciation is the same as purchased equipment.

Property entered into a sale-leaseback is treated as starting on May 5, 2003 instead of September 10, 2001 provided the person who sells the property leases it back within 3 months after the property was placed in service. The date that the property is placed in service cannot be earlier than the date the property is used.

The cap for new vehicle depreciation has been increased by $4,600 so the total cap is $7,660 for the 30% Bonus Depreciation and by $7,600 so the cap is $10,710 for the 50% Bonus Depreciation. For new electric vehicles the 50% Bonus Depreciation is increased to $22,950.

The 50% Bonus Depreciation rate does not apply to New York Liberty Zone property but other depreciation under Section 168K as long as this code is in effect.

Ask any one of our sales representatives about this tax savings plan!!!