Student Question of the Week: Income Tax

Student Question from: Amanda S.
Course:  Income Tax – Code Section 179

Student Question:

Hi there! Can you explain more about the second bullet in the blue box (shown below) regarding the $560k excess and how it works? I think I understand the first scenario in the example: $560k – $139k allowed for immediate expense = $421k remaining eligible for MACRS. What I don’t understand is how the $600k purchase only allows for $99k for immediate expense and then $501k for MACRS depreciation. Will you help me understand, please?   

For property to qualify for Code Section 179 immediate expensing, certain conditions must be met. Below we have discussed three primary restrictions. 

  • The property cannot be buildings or property held for the production of income (such as rental property).
  • If tangible property in excess of $560,000 (also subject to inflation adjustments) is placed in service, then there is a dollar-for-dollar reduction in the amount of property that can be expensed under Code Section 179.

    Example: If a business places in service Section 179 property totaling $560,000 in 2012, then the taxpayer would be allowed a total Section 179 expense reduction of $139,000. (The $421,000 balance would be eligible for MACRS depreciation.) If a business purchased $600,000 of tangible business property, then the taxpayer would be allowed to take a Section 179 expense deduction of $99,000. The balance of $501,000 would be eligible for MACRS depreciation.

Instructor Response:

Hi Amanda! 

I am happy to explain this.  What’s happening is that for every dollar you exceed that $560,000 amount, you lose a dollar of the deduction.  In our example, they purchased and put into place $600,000 (which exceeds the $560,000 limit by $40,000) of depreciable property, so the normal $139,000 deduction is going to be reduced by $40,0000, resulting in a $99,000 deduction.  If they had placed $565,000 of property in use, then the deduction would be $134,000.