First-year Expensing Deduction Restrictions and Limitations

1. Business use must exceed 50%:

To claim first-year expensing for qualified property, business use must exceed 50% in the first year the property is placed in service.

2. Qualifying business equipment must be both purchased and placed in service in the year you take the deduction.

Example:

You purchased a computer in 2012 for personal use then converted it to business use in 2013. You may not deduct first-year expensing for that computer. However, you may claim regular MACRS depreciation.

3. The deduction is limited to tangible personal property purchased for business use, such as:

  • A car or truck acquired from nonrelated parties
  • Computer
  • Machinery
  • Office equipment
  • Off-the-shelf software

4. The maximum expensing deduction in 2013 (and 2012) is $500,000.

5. Maximum deduction in 2013 (and 2012) for heavy trucks, vans, and SUVs weight-rated over 6,000 pounds:

$25,000 is the maximum first-year expensing deduction for trucks, vans, and SUVs, weight-rated at over 6,000 pounds gross vehicle weight (fully loaded) but not more than 14,000 pounds.

The $25,000 Section 179 limit does not apply to...

  • A vehicle designed to seat more than nine persons behind the driver’s seat.
  • A vehicle equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible directly from the passenger compartment, or
  • A vehicle that has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

6. Maximum depreciation deduction in 2013 (and 2012) for cars and light duty trucks, vans and SUVs:

  • $3,160 is the annual ceiling for passenger cars
  • $3,360 is the annual ceiling for vans, trucks, and SUVs 6,000 pounds or less.

2013 (and 2012) 50% Bonus depreciation:

If you elect to take the special depreciation allowance for qualified passenger automobiles placed in service in 2013, the limit is $11,160 ($3,160 plus $8,000).

7. Property traded in:

If you trade-in property for other property, the cost eligible for first-year expensing is limited to the cash you paid. The adjusted basis of the property traded is not eligible.

Example:

You purchase a computer for $1,500 and use it 100% for business. You pay $1,000 cash and are allowed $500 for your old computer. Your first-year expensing is limited to $1,000.

8. Taxable income limitation:

The first-year expensing deduction may not exceed the net taxable income from all businesses you actively conduct.

Note that even wages from a job is considered a "business" you actively conduct for the purpose of figuring your taxable income limitation..

For example, if you're a sole proprietor and your Schedule C net income is $30,000 and W-2 wages from a job that either you and/or your spouse earned and reported on line 7 of Form 1040 is $20,000, then $50,000 of income its taken into account when figuring the taxable income limitation for the first-year expensing deduction.

You figure net income from active businesses without regard to the following items:

  • The first-year expensing deduction
  • The deduction for self-employment tax entered on Form 1040
  • Any net operating loss carryback or carryforward.

Net income from businesses you actively conduct may include not only business net income but the following items as well:

  • Wages or salary you earn as an employee.
  • If you're married, you may also include your spouse's wages.

Net loss from all actively conducted businesses:

  • If you have an overall net loss from all actively conducted businesses you may not claim an expensing deduction for that year.

Net taxable income less than cost of qualifying property:

  • If overall net taxable income is less than the cost of qualifying property, the first-year expensing deduction is limited to net taxable  income.
  • However, the cost that exceeds overall net taxable income may be carried over to the next year and added to the annual expensing allowance for that year.

Example:

In 2013, your spouses wages and your Schedule C net profit from your sole proprietorship totals $100,000. In 2013 you purchased and placed in service qualified property costing $108,000.

Result:

  • Your maximum deduction for 2013 is $100,000 (equal to your spouse's wages and your Schedule C net profit).
  • You may carry over the remaining $8,000 to 2014 and add it to your first-year-expensing allowance for that year.
  • Your carryover to 2013 is barred if you did not claim the first-year expensing deduction on your return for the year the property was placed in service.
    • For example, you must complete the expensing section of Form 4562 for 2013 in order to get a carryover to 2014.

9. Purchases exceeding $2,000,000 in tax year 2013:

The annual expensing limit of $500,000 for 2013 (and 2012) must be reduced dollar for dollar by qualifying purchases exceeding $2,000,000

Example:

In 2013 you spend $2,010,000 on qualified property. The maximum 2013 first-year expensing deduction of $500,000 must be reduced by $10,000 ($2,010,000,000 minus $2,000,000).

Your maximum first-year expensing deduction for 2013 is $490,000 ($500,000 minus $10,000).

10. Accelerated MACRS recapture:

If you dispose of property you depreciated using MACRS, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable.

11. Recapture of Section 179 expense deduction on listed property:

If you used listed property more than 50% in a qualified business use in the year you placed the property in service and used it 50% or less in a later year, you may have to recapture in the later year part of the section 179 expense deduction. Use Form 4797 to figure the recapture amount.

12. Residential rental and nonresidential rental real property:

There is no recapture for residential rental and nonresidential real property, unless that property is qualified property for which you claimed a special depreciation allowance (discussed earlier). For more information on depreciation recapture, see Pub. 946.

13. First-year expensing is not allowed for the following:

  • Buildings
  • Structural components of buildings
  • Furniture and refrigerators used in operating apartment buildings
  • Property held for the production of income
  • Property used 50% or less for business

Partial business use: If you use your vehicle less than 100% for business you must allocate the deduction to business use.

Example:

  • In 2013 you purchased and placed in service an SUV, weight-rated over 6,000 pounds but not more then 14,000 pounds.
  • The cost of the vehicle was $40,000
  • Business use was 75%
  • Your depreciable basis is $30,000 (75% x $40,000)

You may deduct a first-year expensing deduction up to $25,000. The remaining $5,000 may be depreciated using accelerated MACRS or straight-line depreciation.

You can use one of the following methods to depreciate property:

  • 200% declining balance method (200% DB) over a 5-year recovery period:
    •  (it switches to the straight-line method when that method produces an equal or greater deduction. The switch is built into the table).
  • 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight-line method when that method produces an equal or greater deduction (the switch is built into the table).
  • Straight-line method over a 5-year recovery period.