Section 179 is a very business friendly tax provision meant to give small to medium-sized businesses the tax incentive to purchase qualified property. When combined with §168 MACRS deduction, and §168(k) Bonus Depreciation (to be discussed in a later post), those in the horse business can usually recover a significant amount of their depreciable costs immediately.
Although a generous tax provision, §179 is subject to three limitations:
- Type of property – qualified property must generally be new and used tangible property, but also may include computer software and real property, as specified in §1245(a)(3). Horses qualify.
- Dollar limitation – the maximum expense allowable starting in tax year 2016 is $500,000, and is reduced dollar-for-dollar over $2,000,000 of the aggregate costs of those qualified properties placed in service in the same taxable year. Both amounts will be indexed to inflation.
- Income limitation – bars a taxpayer from expensing an amount greater than their taxable income (including wages and salaries) from the active conduct of all their trades or businesses. Section 179 may not by itself create or increase a loss, and any excess not used in that taxable because of the income limitation may be carried over to the next taxable year.
Section 179 is also useful because it provides taxpayers with significant planning opportunities:
- The taxpayer can allocate their deduction amounts among their qualified property, meaning that they may want to consider applying their section §179 amounts first to those qualified properties that depreciate slower than others.
- Applying §179 to an asset may impact whether the half-year or mid-quarter convention applies to those assets placed in service in a taxable year.
Note that §179 property is subject to the recapture rules so that any prior §179 expense may have to be recaptured as ordinary income if the asset is later sold.