Although Section 179 does not allow the business to increase the total amount that it can legally deduct, it does allow the full amount of the depreciation to be clawed back in one year rather than several years which was the case prior to the introduction of this section of the tax code. The IRS refers to Section 179 as “first year expensing”, where expensing is an accounting term used when deducting depreciation against a long term asset.
What assets qualify for a Section 179 tax credit?
Basically, it covers any asset that you use in your business for greater than half the time and it is considered as a long term, tangible asset. The asset can be brand new or used and can be written off in a year as long as the IRS believes that it will last longer than one year. Good examples are computers, off-the-shelf computer software, production machinery and office furniture.
Section 179 cannot be used to deduct the cost of land, buildings or building components such as fences, any inventory or property which is not used in the United States plus others.
The issue is that the property which qualifies for Section 179 tax credit must be used primarily for business. Property purchased which is for personal use is not qualified for the deduction; the asset must be used for more than 50 percent for business purposes. The amount of the tax deduction that is applicable is based on the percentage of the asset that is exclusive to business. The IRS will be critical of this percentage and it is important to maintain good records of the usage pattern. If the asset is used for less than half the time for business, the depreciation schedule will revert to that which was in effect prior to 2007 when Section 179 came into force.
The 50 percent usage limitation is applicable to the year in which the asset was purchased; a tax credit for assets purchased prior to the tax year in question cannot be used in calculating the tax due. Section 179 tax credits are only available to allowed assets which were purchased, not leased and the asset must be purchased from a third party, not a company that is controlled by the same shareholders.
