Cash Flow Analysis and Other Factors

Elective Expensing

Section 179 of the U.S. Internal Revenue Code (26 U.S.C. § 179) allows a taxpayer to deduct the cost of certain types of property on their income taxes as an expense rather than requiring the cost of the property to be capitalized and depreciated. This property is generally limited to tangible, depreciable personal property acquired by purchase for use in the active conduct of a trade or business. This can afford considerable tax savings in some circumstances.

Property

Before the passage of the Small Business Jobs Act of 2010, buildings were not eligible for Section 179 deductions; however, qualified real property may now be deducted. Depreciable property not eligible for a Section 179 deduction is still deductible over several years through MACRS depreciation according to Sections 167 and 168.

The 179 election is optional, and the eligible property may be depreciated according to sections 167 and 168 if preferable for tax reasons. Furthermore, the 179 election may be made only for the year the equipment is placed in use and is waived if not taken for that year. However, if the election is made, it is irrevocable unless special permission is given.

Limitations

The §179 election is subject to three important limitations:

1. There is a dollar limitation. Under Section 179(b)(1), the maximum deduction a taxpayer may elect to take in a year is $500,000 in 2010 and 2011, $125,000 in 2012, and $25,000 for years beginning after 2012.
   
   
2. Suppose a taxpayer places more than $2 million worth of Section 179 property into service during a single taxable year. In that case, the 179 deduction is reduced, dollar-for-dollar, by the amount exceeding the $2 million threshold. This threshold was further reduced to $500,000 in 2012 and then $200,000 afterward.
   
   
3. Lastly, the section provides that a taxpayer's 179 deduction for any taxable year may not exceed the taxpayer's aggregate income from the active conduct of trade or business by the taxpayer for that year. If, for example, the taxpayer's net trade or business income from active conduct of trade or business was $72,500 in 2006, then the deduction cannot exceed $72,500 that year. However, any deduction not allowed in a given year under this limitation can be carried over to the next year.
   
   

Truck Expensing is applied to property used in a business, such as trucks.