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While getting ready for some tax planning or last minute tax reduction ideas you need look no further than your equipment purchases. The Section 179 deduction for tax years beginning in 2007 is $125,000, which means that you can possibly deduct as an expense assets you buy as opposed to depreciating your asset purchase sometimes over a seven year period. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $500,000 - the reduction is dollar for dollar when the amount exceeds $500,000 for the year. There are special limits and rules for certain economically distressed communities and Gulf Zone areas. The property you elect to deduct must be acquired by purchase - you do not need to have already paid for it - it can be acquired with a loan. If you acquire the property by gift or inherit it you cannot claim a section 179 deduction.
What is Section 179 Property - see our glossary of terms
You can elect to expense part or all of the cost of section 179 property that you placed in service during the tax year and used predominantly (more than 50%) in your trade or business. However, for taxpayers other than a corporation, this election does not apply to any section 179 property you purchased and leased to others unless: You manufactured or produced the property or the term of the lease is less than 50% of the property's class life and, for the first 12 months after the property is transferred to the lessee, the deductions related to the property allowed to you as trade or business expenses (except rents and reimbursed amounts) are more than 15% of the rental income from the property.
REMEMBER: If you elect to expense section 179 property you must reduce the remaining amount of property by the amount on which you figure your depreciation or amortization deduction (including any special depreciation allowance) by the section 179 expense deduction.
An example would be you acquire a $30,000 machine you use 100% in your business. You elect to expense $20,000 under section 179. The remaining $10,000 can be depreciated using regular depreciation methods.
Generally, the maximum section 179 deduction is $125,000. There are limits associated with limited property such as cars where there are limits on the amount of depreciation you can take in any given year. There are also deduction limits for c-Corporations; S-Corps; partnerships and sole proprietors SO check with your tax advisor!!
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