Table of Contents
- What's New for 2007
- What's New for 2008
- Introduction
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Overview of Depreciation
- What Property Can Be Depreciated?
- What Property Cannot Be Depreciated?
- When Does Depreciation Begin and End?
- Can You Use MACRS To Depreciate Your Property?
- What Is the Basis of Your Depreciable Property?
- How Do You Treat Repairs and Improvements?
- Do You Have To File Form 4562?
- How Do You Correct Depreciation Deductions?
- Section 179 Deduction
- Claiming the Special Depreciation Allowance
- Figuring Depreciation Under MACRS
- Which Depreciation System (GDS or ADS) Applies?
- Which Property Class Applies Under GDS?
- What Is the Placed-in-Service Date?
- What Is the Basis for Depreciation?
- Which Recovery Period Applies?
- Which Convention Applies?
- Which Depreciation Method Applies?
- How Is the Depreciation Deduction Figured?
- How Do You Use General Asset Accounts?
- When Do You Recapture MACRS Depreciation?
- Additional Rules for Listed Property
- Depletion
- Amortization
Increased section 179 deduction dollar limits. The maximum amount you can elect to deduct for most section 179 property you placed in service in 2007 is $125,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $500,000. See Dollar Limits under Section 179 Deduction, later.
Extension of increased section 179 deduction. If you own qualified section 179 GO Zone property acquired after August 27, 2005, and placed it in service before January 1, 2009, you may be eligible for an increased section 179 deduction.
If you buy farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Instead, you must spread the cost over the time you use the property and deduct part of it each year. For most types of property, this is called depreciation.
This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987.

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Overview of depreciation.
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Section 179 deduction.
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Special depreciation allowance.
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Modified Accelerated Cost Recovery
System (MACRS). -
Listed property.
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Basic information on cost depletion (including timber depletion) and percentage depletion.
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Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles.
Publication
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463 Travel, Entertainment, Gift, and Car Expenses
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534 Depreciating Property Placed in Service Before 1987
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535 Business Expenses
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544 Sales and Other Dispositions of Assets
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551 Basis of Assets
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946 How To Depreciate Property
Form (and Instructions)
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T
Forest Activities Schedule -
3115
Application for Change in Accounting Method -
4562
Depreciation and Amortization -
4797
Sales of Business Property
See chapter 17 for information about getting publications and forms.

Publication 946.
This overview discusses basic information on the following.
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What property can be depreciated.
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What property cannot be depreciated.
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When depreciation begins and ends.
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Whether MACRS can be used to figure depreciation.
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What is the basis of your depreciable property.
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How to treat repairs and improvements.
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When you must file Form 4562.
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How you can correct depreciation claimed incorrectly.
You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. You can also depreciate certain intangible property, such as copyrights, patents, and computer software. To be depreciable, the property must meet all the following requirements.
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It must be property you own.
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It must be used in your business or income-producing activity.
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It must have a determinable useful life.
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It must have a useful life that extends substantially beyond the year you place it in service.
To claim depreciation, you usually must be the owner of the property. You are considered as owning property even if it is subject to a debt.
To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment use), the income must be taxable. You cannot depreciate property that you use solely for personal activities. However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use.
To be depreciable, your property must have a determinable useful life. This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
Certain property cannot be depreciated, even if the requirements explained earlier are met. This includes the following.
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Land. You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. See chapter 1 of Publication 946.
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Property placed in service and disposed of in the same year. Determining when property is placed in service is explained later.
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Equipment used to build capital improvements. You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements.
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Intangible property such as section 197 intangibles. This property does not have a determinable useful life and generally cannot be depreciated. However, see Amortization, later. Special rules apply to computer software (discussed below).
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Certain term interests (discussed below).
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It is readily available for purchase by the general public.
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It is subject to a nonexclusive license.
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It has not been substantially modified.
You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.
Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.
Example.
You bought a planter for use in your farm business. The planter was delivered in December 2007 after harvest was over. You begin to depreciate the planter for 2007 because it was ready and available for its specific use in 2007, even though it will not be used until the spring of 2008.
If your planter comes unassembled in December 2007 and is put together in February 2008, it is not placed in service until 2008. You begin to depreciate it in 2008.
If your planter was delivered and assembled in February 2008 but not used until April 2008, it is placed in service in February 2008, because this is when the planter was ready for its specified use. You begin to depreciate it in 2008.
Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine.
You stop depreciating property when you have fully recovered your cost or other basis. This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property.
You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events.
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You sell or exchange the property.
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You convert the property to personal use.
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You abandon the property.
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You transfer the property to a supplies or scrap account.
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The property is destroyed.
For information on abandonment of property, see chapter 8. For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts.
You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. MACRS is explained later under Figuring Depreciation Under MACRS.
You cannot use MACRS to depreciate the following property.
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Property you placed in service before 1987. Use the methods discussed in Publication 534
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Certain property owned or used in 1986. See Chapter 1 of Publication 946.
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Intangible property.
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Films, video tapes, and recordings.
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Certain corporate or partnership property acquired in a nontaxable transfer.
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Property you elected to exclude from MACRS.
For more information, see Chapter 1 of Publication 946.
To figure your depreciation deduction, you must determine the basis of your property. To determine basis, you need to know the cost or other basis of your property.
You generally deduct the cost of repairing business property in the same way as any other business expense. However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Treat improvements as separate depreciable property. See chapter 1 of Publication 946 for more information.
Example.
You repair a small section on a corner of the roof of a barn that you rent to others. You deduct the cost of the repair as a business expense. However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. You depreciate the cost of the new roof.
Use Form 4562 to claim your deduction for depreciation and amortization. You must complete and attach Form 4562 to your tax return if you are claiming any of the following.
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A section 179 deduction for the current year or a section 179 carryover from a prior year.
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Depreciation for property placed in service during the current year.
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Depreciation on any vehicle or other listed property, regardless of when it was placed in service.
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Amortization of costs that began in the current year.
For more information, see the Instructions for Form 4562.
If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.
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You claimed the incorrect amount because of a mathematical error made in any year.
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You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule.
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You have not adopted a method of accounting for the property.
If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See the Instructions for Form 3115.
You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
This part of the chapter explains the rules for the section 179 deduction. It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction.
For more information, see chapter 2 of Publication 946.
To qualify for the section 179 deduction, your property must meet all the following requirements.
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It must be eligible property.
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It must be acquired for business use.
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It must have been acquired by purchase.
To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.
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Tangible personal property.
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Other tangible property (except buildings and their structural components) used as:
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An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
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A research facility used in connection with any of the activities in (a) above, or
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A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
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Single purpose agricultural (livestock) or horticultural structures.
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Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
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Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified.
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Machinery and equipment.
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Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment.
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Gasoline storage tanks and pumps at retail service stations.
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Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals.
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To house, raise, and feed a particular type of livestock and its produce.
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To house the equipment, including any replacements, needed to house, raise, or feed the livestock.
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A greenhouse specifically designed, constructed, and used for the commercial production of plants.
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A structure specifically designed, constructed, and used for the commercial production of mushrooms.
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Stocking, caring for, or collecting livestock or plants or their produce.
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Maintaining the enclosure or structure.
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Maintaining or replacing the equipment or stock enclosed or housed in the structure.
To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify. Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase.
Example.
Ken is a farmer. He purchased two tractors from his father. He placed both tractors in service in the same year he bought them. The tractors do not qualify as section 179 property because Ken and his father are related persons. He cannot claim a section 179 deduction for the cost of these machines.
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Certain property you lease to others (if you are a noncorporate lessor).
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Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging.
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Air conditioning or heating units.
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Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business.
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Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months).
Your section 179 deduction is generally the cost of the qualifying property. However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. These limits apply to each taxpayer, not to each business. However, see Married individuals under Dollar Limits, later. See also the special rules for applying the limits for partnerships and S corporations, later, under Partnerships and S Corporations.
If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct.
Use Part I of Form 4562 to figure your section 179 deduction.
Example.
J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $15,000. They received a $5,000 trade-in allowance and paid $10,000 cash for the new pickup truck.
Only the cash paid by J-Bar qualifies for the section 179 deduction. J-Bar's business costs that qualify for a section 179 deduction are $15,200 ($5,200 + $10,000).
The total amount you can elect to deduct under section 179 for most property placed in service in 2007 is $125,000. If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $125,000. You do not have to claim the full $125,000.
Example.
This year, you bought and placed in service a tractor for $120,000 and a mower for $6,200 for use in your farming business. You elect to deduct the entire $6,200 for the mower and $118,800 for the tractor, a total of $125,000. This is the most you can deduct. Your $6,200 deduction for the mower completely recovered its cost. Your basis for depreciation is zero. The basis of your tractor for depreciation is $1,200. You figure this by subtracting the amount of your section 179 deduction, $118,800, from the cost of the tractor, $120,000.
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$100,000 or
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The cost of the qualified section 179
GO Zone property placed in service during the year.
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$600,000 or
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The cost of qualified section 179 GO Zone property placed in service during the year.
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The dollar limit (after reduction for any cost of section 179 property over $500,000).
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The total cost of section 179 property you and your spouse elected to expense on your separate returns.
The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.
Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. See Carryover of disallowed deduction, later.
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Section 1231 gains (or losses) as discussed in chapter 9.
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Interest from working capital of your trade or business.
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Wages, salaries, tips, or other pay earned as an employee.
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The section 179 deduction.
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The self-employment tax deduction.
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Any net operating loss carryback or carryforward.
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Any unreimbursed employee business expenses.
| Step | Action |
| 1 | Figure taxable income without the section 179 deduction or the other deduction. |
| 2 | Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. |
| 3 | Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. |
| 4 | Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. |
| 5 |
Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in
Step 1. |
| 6 | Figure your actual section 179 deduction using the taxable income figured in Step 5. |
| 7 |
Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in
Step 1. |
| 8 | Figure your actual other deduction using the taxable income figured in Step 7. |
Example.
On February 1, 2007, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $125,000. It elects to expense the entire $125,000 cost under section 179. In June, the corporation gave a charitable contribution of $10,000. A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $145,000. XYZ figures its section 179 deduction and its deduction for charitable contributions as follows.
| Step 1. Taxable income figured without either deduction is $145,000. |
| Step 2. Using $145,000 as taxable income, XYZ's hypothetical section 179 deduction is $125,000. |
| Step 3. $20,000 ($145,000 - $125,000). |
| Step 4. Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. |
| Step 5. $143,000 ($145,000 - $2,000). |
| Step 6. Using $143,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Because the taxable income is at least $125,000, XYZ can take a $125,000 section 179 deduction. |
| Step 7. $20,000 ($145,000 - $125,000). |
| Step 8. Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. |
Example.
Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. The taxable income from her business (determined without regard to both a section 179 deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Her section 179 deduction was limited to $6,000. The $2,000 cost that was not allowed as a section 179 deduction (because of the business income limit) is carried to this year.
This year, Joyce placed another machine in service that cost $9,000. Her taxable income from business (determined without regard to both a section 179 deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. She can carry over the balance of $1,000 to next year.
The section 179 deduction limits apply both to the partnership or S corporation and to each partner or shareholder. The partnership or S corporation determines its section 179 deduction subject to the limits. It then allocates the deduction among its partners or shareholders.
If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. To determine any reduction in the dollar limit for costs over $500,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. For more information, see chapter 2 of Publication 946.
Example.
In 2007, Partnership P placed in service section 179 property with a total cost of $580,000. P must reduce its dollar limit by $80,000 ($580,000 - $500,000). Its maximum section 179 deduction is $45,000 ($125,000 - $80,000), and it elects to expense that amount. Because P's taxable income from the active conduct of all its trades or businesses for the year was $50,000, it can deduct the full $45,000. P allocates $20,000 of its section 179 deduction and $25,000 of its taxable income to John, one of its partners.
John also conducts a business as a sole proprietor and in 2007, placed in service in that business, section 179 property costing $14,000. John's taxable income from that business was $5,000. He elects to expense the $20,000 allocated from P, plus the $14,000 of his sole proprietorship's section 179 costs. However, John's deduction is limited to his business taxable income of $30,000 ($25,000 from P plus $5,000 from his sole proprietorship). He carries over $4,000 ($34,000 - $30,000) of the elected section 179 costs to 2008.
You elect to take the section 179 deduction by completing Part I of Form 4562.

Form 4562 before completing Part I.
File Form 4562 with either of the following:
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Your original tax return (whether or not you filed it timely), or
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An amended return filed within the time prescribed by law. An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. The amended return must also include any resulting adjustments to taxable income.
You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. You also increase the basis of the property by the recapture amount. Recovery periods for property are discussed later.


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Figure the allowable depreciation for the section 179 deduction you claimed. Begin with the year you placed the property in service and include the year of recapture.
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Subtract the depreciation figured in (1) from the section 179 deduction you actually claimed. The result is the amount you must recapture.
Example.
In January 2005, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. The property is not listed property. He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. He used the property only for business in 2005 and 2006. During 2007, he used the property 40% for business and 60% for personal use. He figures his recapture amount as follows.







