Section 179 Limitations

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There are two separate limits when trying to claim the section 179 expense deduction. The dollar limit is the maximum amount of section 179 expense that can be deducted in any year. This dollar limit can be reduced when the cost of section 179 property placed in service during the current year exceeds the threshold cost. The cost of section 179 property is the total cost of all properties placed in service during the year that are eligible for section 179 expense, such as machinery, furniture, and automobiles, whether or not section 179 expense was claimed on those properties. Real property is excluded from section 179 and is therefore not included when determining the cost of section 179 property placed in service. For every dollar that the cost of section 179 property exceeds the threshold cost the maximum amount allowed is reduced by one dollar.

For 2006, the Section 179 deduction limit is $108,000.

Example For 2004 the dollar limit is $102,000 and the threshold cost is $410,000. If a taxpayer has placed $450,000 of section 179 property in service during 2004, the dollar limit is reduced by $40,000 = $450,000 - $410,000. Therefore, the maximum section 179 expense allowed to this taxpayer is $62,000 = $102,000 - $40,000. Form 4562, lines 1 through 5 facilitate the dollar limitation.

The second limit that applies to section 179 expense is the business income limitation. The amount of section 179 expense that can be claimed is limited to the amount of the taxpayer's business income. Business income is defined as the total taxable income from any trade or business that was actively conducted, which includes wages as well as Schedule C, Business income. There is some question as to whether or not income earned from active participation in rental real estate should be included, but the Form 4562 instructions state that if you meaningfully particpate in the management or operations of the trade or business the income should be included.

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