CH10_Notes - Chapter 10 - Section 179 and Additional 1st...

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Chapter 10 - Section 179 and Additional 1 st Year Depreciation The 2008 Economic Stimulus Act (ESA) increases the Section 179 Election to Expense deduction and provides for additional 1 st year depreciation for qualifying property placed in service during tax years that begin in 2008. Property placed in service in tax years beginning after 2008 are not eligible for the increased deductions provided by the ESA. The Section 179 Election to Expense is increased to $250,000 (from $128,000). In addition, the phase-out of the deduction for excess investment is increased from $510,000 to $800,000. Thus, taxpayers who place less than $800,000 of qualifying property in service during a tax year beginning in 2008 will be able to expense up to $250,000 of the cost of the property. The remainder of this update consists of the changes to the Chapter 10 text necessary to implement the ESA changes and problems designed to illustrate these changes. Section 179 Election to Expense Section 179 allows an annual current expense deduction for the cost of qualifying depreciable property purchased for use in a trade or business. The deduction for expensed assets is treated as a depreciation deduction. This election allows many small businesses to expense assets as they are purchased instead of depreciating them over several years. The immediate deduction promotes administrative convenience by eliminating the need for extensive depreciation schedules for small purchases. Qualified Taxpayers In 2008, individuals, corporations, S corporations, and partnerships may elect to deduct as an expense up to $250,000 in investment in qualified property to be used in an active trade or business. A husband and wife are considered one entity for purposes of the election to expense. Although the phrase ‘‘active trade or business’’ is not defined in the tax law, it appears to have the same meaning as the phrase ‘‘trade or business’’ (Chapter 5). The elements of profit motivation, regularity, and continuity of the taxpayer’s involvement in the activity and the absence of hobby, amusement, and similar motivations are important factors to consider when determining whether an activity qualifies for the Section 179 election. This interpretation is supported by the fact that the deduction is not allowed for assets purchased for use in an activity related to the production of income (an investment activity). However, the portion of a mixed-use asset that is used in a trade or business does qualify for immediate deduction under Section 179. Estates and trusts cannot use the Section 179 election to expense assets. The election is not available to these entities because they are formed to protect and conserve the entity’s assets for the benefit of the beneficiaries and not to operate an active trade or business. Qualified Property
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CH10_Notes - Chapter 10 - Section 179 and Additional 1st...

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