725 / When can a taxpayer elect to treat the cost of property as an expense in the year the property is placed in service under IRC Section 179?

A taxpayer may elect to treat the cost of certain qualifying property as an expense in the year the property is placed in service.¹ To qualify, property must be eligible for depreciation or certain amortization provisions, it must be personal property (or fall within certain other categories described in IRC Section 1245(a)(3), such as property used for manufacturing or as a storage facility), and must have been acquired by purchase (from an unrelated person) for use in the active conduct of a trade or business. This property does not include any air conditioning or heating units or any ineligible property described in IRC Section 50(b) (certain property used outside the U.S., for lodging, by tax-exempt organizations, or by governments or foreign persons or entities). This election is not available to a trust or estate, nor can it be used for property held for the production of income.²

For tax years beginning after December 31, 2017, the 2017 tax reform legislation expanded the definition of qualifying property³ to include certain depreciable tangible property used primarily to provide lodging or in connection with providing lodging, and to include certain improvements to nonresidential real property that is placed in service after the date that the underlying property was first placed in service (roofs, heating, ventilation, air conditioning, fire protection and alarm systems, and security systems).⁴

Recent legislation has raised the dollar amount that can be expensed for property placed in service in 2008 and beyond (these provisions were made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH)). The aggregate cost deductible for 2008 and 2009 could not exceed $250,000.⁵ The aggregate cost deductible for 2010 and thereafter is $500,000 (indexed for inflation; the amount for 2017 was $510,000). The annual dollar limitation was reduced by one dollar for each dollar of such investment above $800,000 for 2008 and 2009, above $2 million for 2010 and thereafter (as indexed).⁶ In 2017, the $2 million amount is indexed to $2,030,000 ($2,010,000 in 2016).⁷ The 2017 Tax Act increased the maximum amount that can be expensed during the tax year to $1,000,000,⁸ and increased the phase-out threshold amount from $2,000,000 to $2,500,000.⁹

These amounts are indexed for inflation for tax years beginning after 2018 ($1,020,000 and $2,550,000 for 2019, $1,040,000 and $2,590,000 for 2020, $1,050,000 and $2,620,000 for 2021, and $1,080,000 and $2,700,000 for 2022, $1,160,000, $2,890,000 for 2023, $3,050,000 in 2024 and $3,130,000 in 2025).¹⁰

The amount expensed is limited to the aggregate amount of income derived from the active conduct of any trade or business of the taxpayer. An amount that is not deductible because it exceeds the aggregate taxable income from any trade or business may be carried over and taken in a subsequent year. The amount that may be carried over and taken in a subsequent year is the lesser of (1) the amounts disallowed because of the taxable income limitation in all prior taxable years (reduced by any carryover deductions in previous taxable years); or (2) the amount of unused expense allowance for such year. The amount of unused expense allowance is the excess of (1) the maximum cost of property that may be expensed taking into account the dollar and income limitations; over (2) the amount the taxpayer elects to expense.¹¹ Married individuals filing separately are treated as one taxpayer for purposes of determining the amount that may be expensed and the total amount of investment in such property.¹² The general business credit is not allowed for any amount expensed under IRC Section 179.¹³

Deductions permitted pursuant to a valid election to expense costs are not prorated if the taxpayer has a short tax year.¹⁴