Vehicle Mileage Books and Auto Mileage Logs - Section 179 Deduction Guidelines

Section 179 Deduction Guidelines

IRS Rules for Accelerated Depreciation Deductions

The section 179 deduction allows you to choose to treat part or all of the business cost of a car as a current expense rather than taking depreciation deductions over a specified recovery period.

Even though you may be able to claim a section 179 deduction, the limit on total section 179 and depreciation deductions (discussed later) may reduce or eliminate any benefit from claiming it.

You can claim the section 179 deduction only in the year you place the car in service. For this purpose, a car is placed in service when it is ready and available for a specific use, whether in trade or business, the production of income, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use. A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business.

Example. In 1997 you bought a new car and placed it in service for personal purposes. This year, you began to use it for business. Changing its use to business use does not qualify the cost of your car for a section 179 deduction this year. However, you can claim a depreciation deduction for the business use of the car. See Depreciation Deduction, later.

Limits. There are limits on:

1. The total cost of property qualifying for a section 179 deduction, and

2. The total amount of the section 179 deduction plus the depreciation deduction (discussed later).

Limit on cost of qualifying property. Generally, you can choose to treat up to $19,000 of the cost of qualifying property as a section 179 deduction in 1999. (The amount increases each year up to 2003.) The yearly limit, however, depends on the percentage of business use, and you must use the property more than 50% for business to claim any section 179 deduction.

Example. Peter purchased a car this year for $4,500 and he used it 60% for business. The total cost of Peter's car that qualifies for the section 179 deduction is $2,700 ($4,500 cost Ã— 60% business use). But see Limit on total section 179 and depreciation deductions, discussed next.

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Limit on total section 179 and depreciation deductions. Generally, the total amount of section 179 and depreciation deductions that you can claim for a car that you place in service in 1999 cannot be more than $3,060. The limit is reduced if your business use of the car is less than 100%. See Depreciation Limits, later, for more information.

Example. Peter, in the previous example, had a car with a qualifying cost of $2,700 for his section 179 deduction. However, Peter is limited to a total section 179 deduction plus depreciation deduction of $1,836 ($3,060 limit Ã— 60% business use).

Cost of car. For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car.

Basis of car. The amount of the section 179 deduction reduces your basis in your car. If you choose the section 179 deduction, you must reduce your basis in your car before you figure your depreciation deduction.

Choosing a section 179 deduction can give you a larger total deduction (depreciation plus section 179 deduction) in the first year. Not choosing it can give you a larger depreciation deduction in later years.

Example. On January 2, 1999, Stella bought a car for $12,000, including sales tax, to use exclusively in her delivery business. She paid $9,000 cash and received $3,000 in trade for her old car (also used in her business). Her adjusted basis in her old car was $3,000.

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Only the $9,000 cash Stella paid qualifies for the section 179 deduction. If she does not choose section 179, her basis for depreciation is $12,000. The total of her section 179 and depreciation deductions is limited to $3,060, the first year maximum. If she does not choose section 179, her depreciation deduction, using the MACRS method (discussed later), is $2,400 [$12,000 basis Ã— 20% (double declining balance rate)] from Table 3, explained later.

When to choose. If you want to take the section 179 deduction, you must make the choice in the tax year you both purchase the car and place it in service for business or work. Employees use Form 2106 to make this choice and report the section 179 deduction. All others use Form 4562. Make your choice by taking the deduction on the appropriate form and file it with your original tax return. You cannot make the choice on an amended tax return filed after the due date (including extensions). If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Attach the election to the amended return and write "Filed pursuant to section 301.9100-2" on the election statement. File the amended return at the same address you filed the original return. Once made, the choice can be changed only with the consent of the Internal Revenue Service (IRS).

Reduction in business use. To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. If your business use of the car is 50% or less in a later tax year during the recovery period, you have to include in income in that later year any excess depreciation. Any section 179 deduction claimed on the car is included in calculating the excess depreciation. For information on this calculation, see Excess depreciation later in this chapter under Car Used 50% or Less for Business.

Dispositions. If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any depreciation you claimed. For information on the disposition of depreciable property, see chapter 3 of Publication 544, Sales and Other Dispositions of Assets.