42.3 First-Year Expensing Deduction
The dollar limit on first-year expensing in 2012 is $139,000. However, Congress may increase this dollar limit for 2012; see the e-Supplement at jklasser.com .
The $139,000 limit is phased out if the cost of qualifying property placed in service during 2012 exceeds $560,000.
Law Alert
Costs eligible for expensing.
You may elect first-year expensing for tangible personal property bought for business use, such as machinery, equipment, or a car, truck or computer, provided the property is acquired from a non-related party. Expensing is not allowed for property held for investment.
To elect the expensing deduction for the cost of qualifying property for 2012, the qualifying property must have been purchased and placed in service in 2012. You may not elect first-year expensing for property purchased before 2012, even if 2012 is the first year you use it for business. For example, if you bought a computer for family use in 2011 and in 2012 you converted it to business use, expensing is not allowed on your 2012 return. For an automobile placed in service in 2012, the maximum expensing deduction is $11,160. The limit is $11,360 for light trucks and vans and for certain SUVs the expensing limit is $25,000 (43.4).
The portion of cost not eligible for first-year expensing may be recovered by depreciation under the regular MACRS rules (42.4–42.5). The first-year expensing deduction is technically called the “Section 179 deduction.”
Law Alert
Electing first-year expensing.
You make the election simply by reporting on Form 4562 the assets for which the election applies. You are permitted to make an election or revoke an election (or change the amount of an election or the assets for which the election applies) on a timely filed amended return. You do not need IRS consent. A revocation, once made, is irrevocable.
Partial business use.
If you use the equipment for both business and personal use, business use must exceed 50% in the year the equipment is first placed into service to claim a first-year expensing deduction. The expensing deduction may be claimed for the cost allocated to business use up to the dollar limit; the 2012 limit is $11,160 for cars placed in service during 2012 (43.4).
To elect first-year expensing for “listed property” such as a computer or car (42.10), business use in the first year you use it must exceed 50%. If it does, you show the amount eligible for expensing in the section for “Listed Property” on Form 4562 and then transfer the amount to the part of Form 4562 where the expensing election is claimed.
Figuring the deduction.
The maximum expensing deduction in 2012 is $139,000 of the cost of qualifying property and $11,160 for a car (43.4). For business use of less than 100% (but more than 50%), the expensing deduction is limited to the business portion of the cost. As discussed below, the $139,000 limit may have to be reduced because your taxable income is lower than $139,000, eligible purchases exceed $560,000, or you are married filing separately.
If you qualify for the expensing, you do not have to claim the entire amount. If in 2012 you place in service more than one item of property, you may allocate the dollar limit between the items. If you placed in service only one item of qualifying property that cost less than the dollar limit, your deduction is limited to that cost.
If you acquire property in a trade-in, the cost eligible for expensing is limited to the cash you paid. You may not include the adjusted basis of the property traded in, although your basis for the new property includes that amount.
Caution
Effect on regular depreciation.
If the cost basis of the property exceeds the first-year expensing limit, you compute depreciation on the cost of the property less the amount of the first-year deduction.
Limit reduced if taxable income is lower.
Your expensing deduction may not exceed net income from all your active businesses; see the Caution on this page.
Limit reduced if qualifying purchases exceed threshold.
If the total cost of qualifying property placed in service during 2012 is over $560,000, the $139,000 expensing limit is reduced dollar for dollar by the cost of qualifying property exceeding $560,000. For example, if you place in service machinery costing $660,000, the $139,000 limit is reduced by $100,000. The reduced limit of $39,000 is shown on Form 4562 on the line labeled “Dollar limitation for tax year.” If the total cost is $699,000 or more, no first-year expensing deduction is allowed for 2012.
Limit reduced if married filing separately.
If you and your spouse file separate returns, the 2012 expensing limit for both of you is $139,000. Unless you agree to a different allocation, you are each allowed only one-half of the limit or $69,500. The $560,000 phaseout threshold also applies to both of you as a unit. For example, if you place in service qualifying property costing $160,000 and your spouse places $500,000 of property in service, the total cost of $660,000 reduces the $139,000 limit by $100,000 to $39,000. The reduced limit for each of you on separate returns is $19,500.
Filing Instruction
Partners and S corporation stockholders.
For property bought by a partnership or an S corporation, the dollar limit and taxable income limit applies to the business, as well as the owners as individual taxpayers. The partnership or S corporation determines its expensing deduction subject to the limits and allocates the deduction, if any, among the partners or shareholders. The allocated deduction may not exceed the net taxable income of the partnership or S corporation from actively conducted businesses.
An individual partner’s expensing deduction may not exceed dollar limit, regardless of how many partnership interests he or she has. However, the partner must reduce the basis of each partnership interest by the full allocable share of each partnership’s expensing deduction, even if that amount is not deductible because of the dollar limit.
Disqualified acquisitions from related parties.
Property does not qualify for the expense election if:
Recapture of expensing deduction.
Recapture of the first-year expensing deduction may occur on a disposition of the asset or if business use falls to 50% or less. If business use falls to 50% or less after the year the property is placed in service but before the end of the depreciable recovery period (42.4, 42.10), you must “recapture” the benefit from the first-year expensing deduction. The amount recaptured is the excess of the expensing deduction over the amount of depreciation that would have been claimed (through the year of recapture) without expensing (42.10). Recaptured amounts are reported as ordinary income on Form 4797.
Planning Reminder
When you sell or dispose of the property, the first-year expensing deduction is treated as depreciation for purposes of the recapture rules (44.3) that treat gain as ordinary income to the extent of depreciation claimed.