Renewal Community Initiative-Section 179 Deduction

Increased Section 179 Deduction

Target Audience

Incentive Not Relevant to

Questions and Answers

Quick Overview

Tax Incentives

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Section 179 of the Internal Revenue Code allows businesses to choose to deduct all or part of the cost of certain qualifying property (machinery and equipment) in the year they place it in service. Businesses can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period. There are limits, however, on the amount businesses can deduct in a tax year. Businesses may be able to claim an increased Section 179 deduction of as much as $35,000 if they qualify as Renewal Community Businesses.

Target Audience

Businesses with relatively small (less than $200,000) equipment needs in any taxable year, such as labor-intensive businesses with computer costs.
Existing businesses that need to update equipment but are not otherwise purchasing machinery/equipment.
Businesses moving into a Renewal Community (RC) from another location that own the majority of their machinery/equipment but have additional new equipments.

Incentives Not Relevant to

Businesses that cannot meet the definition of a Renewal Community Business.

Certain business activities do not qualify, such as residential rentals; commercial real estate, unless at least 50 percent of the gross rental income is from Renewal Community Businesses; rental of personal property, such as car rental agencies, unless at least 50 percent of the rentals are to Renewal Community Businesses, or RC residents; businesses that predominantly hold or develop intangibles for sale or license; country clubs; liquor stores; golf courses; racetracks; or gambling facilities.

Consolidated companies with large equipment needs within the entire consolidated group.
Machinery/equipment that will be used outside of an RC (such as delivery equipment).
Companies with large or expensive equipment needs on yearly basis.
Startup businesses that expect tax losses or other normal business expenses to equal income.
Businesses with equipment that has a short economic life.

Questions & Answers

What is the benefit of additional expensing?

Expensing permits a business to take a deduction for the full cost of equipment in the year it is purchased. In addition, this write-off of costs means that a business does not have to set up a tax depreciation schedule and deduct the expense over time. Expensing is particularly helpful for equipment with a long recovery period.

Are some businesses ineligible for this incentive?

Certain business activities do not qualify, such as residential rental activity; commercial real estate, unless at least 50 percent of the gross rental income is from Renewal Community Businesses; rental of personal property, such as car rental agencies, unless at least 50 percent of the rentals are to Renewal Community Businesses, or RC residents; businesses that predominantly hold or develop intangibles for sale or license; country clubs; liquor stores; golf courses; racetracks; or gambling facilities.

What type of property qualifies?

The additional expensing allowance is available only for a Qualified Renewal Property (QRP), defined as the following:

Eighty-five percent of the use of the property must be in the active conduct of a Renewal Community Business by a taxpayer in an RC.
The taxpayer acquired the property by purchase after the date of RC designation.
Original use of the property in an RC commences with taxpayer (that is, the taxpayer is the first person to use the property inside an RC), or the taxpayer meets the substantial renovation rule. Property is substantially renovated if, during any 24-month period beginning after RC designation, there are additions to the basis of the property equal to either 100 percent of the adjusted basis of the property or $5,000, whichever is greater.

How does the expensing phase-out limit work?

The general tax rule is that for each $1 of Section 179 property greater than $200,000 placed in service in a tax year, the expensing allowance is reduced by $1. However, for each $1 of QRP greater than $200,000 in a tax year, the expensed amount is reduced by 50¢.

How does a business file for this incentive?

The additional expensing amount is recorded on IRS Form 4562. This form has a special line, along with instruction, for QRP. A business should consult with its tax advisor.

Where can a business obtain more information on this incentive?

For specific information, contact your tax advisor, accountant, or attorney. For general information, contact ___________________