Increased Section 179 Expensing Election Provides Deduction Up To $125,000

Taxpayers considering acquiring a new equipment before year end with a purchase price of less than $625,000 may be entitled to a special deduction beyond depreciation. Congress recently passed The Small Business and Work Opportunity Tax Act of 2007 which expanded deductibility of capital purchases used in business for all tax years beginning after December 31, 2006.

The “expensing election” provides taxpayers an opportunity to currently deduct up to $125,000 from the cost of the property, and then depreciate the balance. In order to qualify for the maximum deduction, the taxpayer may not invest more than $500,000 in capital assets during the year; a partial deduction is allowable for those investing between $500,000 and $625,000. The amount of the deduction is further limited to the amount of any taxable income from any of the taxpayer’s active trades or businesses. An amount that cannot be deducted because of the taxable income limitation is suspended until the taxable income limit is met. Where an expensing election deduction flows to a taxpayer from a partnership, the deduction limitation, the investment ceiling, and the taxable income limitation are applied at both the partnership level and the taxpayer level. However, for purposes of the investment limitation, the cost of qualifying property of that partnership is not attributable or allocated to the partner or shareholder.

It is important to note that in order to qualify for the expensing election, or the depreciation deductions, the property must be placed in service before December 31, 2007.