For small business owners, a key tax provision in recent tax years has become the Section 179 first year bonus depreciation deduction. The write-off can be significant: Up to $108,000 of first year equipment purchases can be claimed as an immediate deduction. But the eligibility rules are confusing. Understanding these rules and budgeting your equipment replacements to fit within the Section 179 parameters is an important part of good tax planning.

Eligibility for the Section 179 first year deduction is limited to smaller businesses that do not exceed an annual asset addition limit. For tax years beginning in 2006, that threshold is $430,000 of eligible purchases. Typically, eligible assets for Section 179 include equipment, fixtures, and vehicles, but not buildings. If the annual eligible purchases exceed the $430,000 threshold, there is a dollar-for-dollar reduction in the eligible first year deduction.

Example. Jones Construction files on a calendar year and purchased equipment of $450,000 during 2006. Jones must reduce its $108,000 Section 179 limit by $20,000, the amount by which its qualifying purchases exceed $430,000. Accordingly, Jones may only claim a first year Section 179 deduction for 2006 of $88,000 ($108,000 - $20,000). Had Jones been able to better budget its equipment purchases for the year to remain below the $430,000 limit, it could have achieved a $20,000 greater first year deduction.

Other Eligibility Rules
In view of the significance of this deduction, it is important to understand the other eligibility restrictions:

• Both new and used assets qualify, but only the boot paid counts if the asset is acquired through a trade.
• An entity’s Section 179 deduction is limited to its business net income. Accordingly, if an S corporation is in a loss position, no Section 179 deduction is allowed.
• Property is ineligible if purchased from a related party.
• Property that is purchased and leased to others faces a complicated calculation to determine eligibility (but this rule does not apply to C corporations).

Special Vehicle Rules
Normally, automobiles are subject to a small annual depreciation limit that makes the Section 179 deduction impractical. For example, for an automobile placed in service in 2006, the first year depreciation limit is $2,960, assuming 100% business use.

But a special privilege exists for vehicles with a gross vehicle weight rating over 6,000 pounds, such as full-size SUVs, pickups, and vans. These vehicles are allowed up to $25,000 of first year depreciation.

But even this $25,000 limit on larger trucks and vans has exceptions. Three categories of over-6,000 pound vehicles continue to qualify for a full write-off of their tax cost under Section 179, up to the $108,000 limit:

• Vehicles with a seating capacity of more than nine persons behind the driver’s seat (e.g., hotel shuttle van).
• A pickup truck with at least a six foot interior length cargo box.
• A van designed to carry cargo with no seating behind the driver’s seat (e.g., an electrician’s or plumber’s van).

Example. Able Mfg. buys a full-size pickup truck with an 8 foot box to be used in the business at a cost of $38,000. Assuming that this vehicle has a weight rating over 6,000 pounds, the entire cost of the pickup may be deducted under Section 179, because it is a truck with a six foot or greater interior length box. On the other hand, if Able purchased a four door pickup with a short 5.5 foot interior length box or an enclosed SUV without an open box, the Section 179 deduction would be limited to $25,000.

If you have any questions concerning the tax issues discussed here, please contact us at info@marg.com.

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