I.R.S. Section 179
Tax Savings for 2007 for Equipment Purchased or Leased
Under IRS Section 179, equipment purchases of up to $112,000 can be expensed (deducted from taxable income) in 2007 if it is the first year eligible property is placed in service in a trade or business. Finance leases ($1.00 buyout) qualify for this deduction in their year of inception.
According to an article in the Wall Street Journal, reflecting on the law passed in 2003, “giving businesses more of a tax break on equipment purchases,... would motivate Corporate America to spend more freely… To take advantage of the tax break, however, companies need to get their equipment in place by the end of [2007], so companies likely will accelerate purchases they might have made in [2008]…”
The 2003 law quadrupled the amount of qualified property that can be expensed under IRS Section 179 from $24,000 to $100,000 (indexed for inflation) for tax years through 2005. The American Job Creation Act of 2004 has extended the use of the $100,000 ceiling for two more years, through 2008. Qualifying property now also includes off-the-shelf computer software.
Normally, these types of assets must be depreciated over a number of years (generally three, five or seven years), so the tax deduction takes a while to be fully realized. But under the provisions of Section 179, 100% of the equipment cost can be deducted in the year that the equipment is placed in service, even if the company finances the entire purchase of the equipment. This bears repeating…even if a company only makes one or two lease payments; it can deduct the full cost of the equipment up to $112,000 for 2007.
For 2007, any purchase in excess of $450,000 reduces the $112,000 Section 179 limit. For example, if you purchase $460,000 in qualifying property, the Section 179 deduction is limited to $102,000.
The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income (determined after application of the investment limitation) derived from the active conduct of any trade or business during the tax year. Costs disallowed under this rule may be carried forward an unlimited number of years subject to the ceiling amount for each year.
Please contact your tax advisor for specific information regarding IRS Section 179, and all accounting procedures.
I.R.S. Section 179
Tax Savings for 2007 for Equipment Purchased or Leased
| Example 1 | Example 2 | |
| Section 179 Deduction - lesser of | ||
| acquisition cost or above line | $30,000 | $120,000 |
| Less: Threshold for Section 179 phase out | $450,000 | $450,000 |
| Amount exceeding threshold | $0 | $0 |
| Section 179 Deduction: | ||
| Acquisition cost of qualifying property | $112,000 | $112,000 |
| Maximum Tax Code 179 | $0 | $0 |
| Less amount exceeding threshold above | $112,000 | $112,000 |
| Threshold Calculation: | ||
| Acquisition cost of qualifying property | $30,000 | $120,000 |
| Less: Threshold for Section 179 phase out | $450,000 | $450,000 |
| Amount exceeding threshold | $0 | $0 |
| Section 179 Deduction: | ||
| Acquisition cost of qualifying property | $112,000 | $112,000 |
| Normal 1st Year Depreciation: | ||
| Acquisition cost of qualifying property | $30,000 | $120,000 |
| Less: Threshold for Section 179 phase out | $120,000 | $112,000 |
| Excess of property cost over 179 deduction | $0 | $8,000 |
| 1st year depreciating on excess (assumed) | ||
| Excess of property cost over 179 deduction | $0 | $8,000 |
| Normal 1st Year Depreciation | $0 | $1,600 |
| Total 1st Year Deduction (2006): | ||
| Section 179 Deduction | $30,000 | $112,000 |
| Normal 1st Year Depreciation | $0 | $1,600 |
| Total 1st Year Deduction | $30,000 | $113,600 |
| Marginal Tax Rate (Assumed) | 35% | 35% |
| Your Tax Savings | $10,500 | $39,760 |
Please consult your tax advisor regarding specific information regarding IRS Section 179 and all accounting procedures.