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The
American Jobs Creation Act of 2004, enacted October 22, 2004, includes a
provision to extend the election of Section 179 deductions for qualified
first year service property for business usage instead of taking
depreciation, through 2007. The
increase in the phase out limits on new investments has also been extended
for the same time period.
Prior
to the passage of this legislation, the increased expense deduction of up to
$100,000+ for qualified assets was scheduled to revert back to its pre-2003
level of $25,000 starting January of 2006. Similarly,
the phase-out of this deduction, which begins with every dollar spent over
$400,000+, was scheduled to revert to its pre-2003 level of $224,000 in
January 2006.
The
deductible amount along with the phaseout amount is indexed each year for
inflation. Any amount disallowed
under the phaseout is lost and cannot be carried over to another year.
The allowable deduction is limited by the taxable income of the trade
or business. Any portion of the
deduction that is in excess of income may be carried forward to the
following years. As well, any
remaining basis in the property, after election of Section 179, can be
depreciated in the first year and subsequent years under MACRS. In
addition, the deductible limits apply separately to partnerships and each
partner and to S corps and each shareholder, with married taxpayers being
treated as one.
Eligible
property being placed into service can be new or used, but must be used more
than 50% in a trade or business. Property
that is eligible for this 179 deduction is any tangible property depreciable
under MACRS or considered Code Section 1245 property, which is personal
tangible and intangible property, property used as an integral part of
manufacturing, production, extraction, or furnishing of transportation,
communications, electrical energy, gas, water, or sewage disposal services.
Included in this is off-the-self computer software that is readily
available for purchase by the general public, subject to nonexclusive
license, and has not been substantially modified.
Property
that is not eligible for this election is property used predominantly
outside the U.S., property used with respect to lodging such as apartment
buildings (excluding hotels and motels), property used by tax-exempt
organizations unless used in connection with an unrelated business income
activity. Property used for
investment or the production of income is not eligible for Section 179
expensing, as well as estates, trusts, and certain noncorporate lessors.
You
may wish to take advantage of the extended deduction and purchase limits in
your tax years beginning before 2008. If you were planning purchases in 2005
that would have exceeded the limit for that year, you may want to consider
postponing some of them to the next year to possibly take full advantage of
the deduction for the purchase price of these assets.
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