What Costs Can & Cannot Be Deducted

Words you may need to know (see Glossary):

• Adjusted basis
• Basis
• Placed in service

You can claim the section 179 deduction for the cost of qualifying property acquired for use in your trade or business. You cannot claim the deduction for the cost of property you hold only for the production of income.

Acquired by Purchase

Only the cost of property you acquired by purchase for use in your business qualifies for the section 179 deduction. The cost of property acquired from a related person or group may not qualify. See Nonqualifying Property, later.

Acquired by Trade

If you buy an asset with cash and a trade-in, you can claim a section 179 deduction based only on the cash you paid. For example, if you buy (for cash and a trade-in) a new truck to use in your business, your cost for the section 179 deduction does not include the adjusted basis of the vehicle you trade for the new truck. For information on figuring your adjusted basis, see Adjusted Basis in Publication 551.

Example. Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. They received an $800 trade-in for the old ovens and paid $520 in cash for the new oven. The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. They received a $4,800 trade-in on the used van and paid $4,200 in cash for the new van.

Silver Leaf's basis in the new property includes both the adjusted basis of the property traded and the cash paid. However, only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Therefore, Silver Leaf has business costs that qualify for a section 179 deduction of $4,720 ($520 + $4,200), the part of the cost of the new property not determined by the property traded.

Qualifying Property

Words you may need to know (see Glossary):

• Adjusted basis
• Basis
• Fungible commodities
• Placed in service
• Structural components

Qualifying section 179 property is depreciable property and includes the following.

1. Tangible personal property.
2. Other tangible property (except buildings and their structural components) used as:
   1. An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
   2. A research facility used in connection with any of the activities in (a) above, or
   3. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.

3. Single purpose agricultural (livestock) or horticultural structures.
4. Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

Leased property. Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. (This rule does not apply to corporations.) However, you can claim a section 179 deduction for the cost of the following.

1. Property you manufacture or produce and lease to others.
2. Property you purchase and lease to others if both the following apply.
   1. The term of the lease (including options to renew) is less than half of the property's class life.
   2. For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rent and reimbursed amounts) are more than 15% of the rental income from the property.

Tangible Personal Property

Tangible personal property is any tangible property that is not real property. Machinery and equipment are examples of tangible personal property.

Land and land improvements, such as buildings and other permanent structures and their components, are real property. Swimming pools, paved parking areas, wharves, docks, bridges, and fences are examples of land improvements. They are not tangible personal property.

Business property. All business property, other than structural components, that is contained in or attached to a building is tangible personal property. Under certain local laws, some tangible personal property cannot be tangible personal property for purposes of section 179. Under certain local laws, some real property, such as fixtures, can be tangible personal property for purposes of section 179. Property such as refrigerators, grocery store counters, transportation and office equipment, printing presses, testing equipment, and signs are tangible personal property.

Gasoline storage tanks and pumps. Gasoline storage tanks and pumps at retail service stations are tangible personal property.

Livestock. Livestock is qualifying property. For this purpose, livestock includes horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

Single Purpose Agricultural (Livestock) or Horticultural Structures

A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 deduction.

For purposes of determining whether a structure is a single purpose agricultural structure, poultry is livestock.

Agricultural structure. A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons.

• House, raise, and feed a particular type of livestock and its produce.
• House the equipment, including any replacements, needed to house, raise, or feed the livestock.

Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock.

Horticultural structure. A single purpose horticultural structure is either of the following.

• A greenhouse specifically designed, constructed, and used for the commercial production of plants.
• A structure specifically designed, constructed, and used for the commercial production of mushrooms.

Use of structure. A structure must be used only for the purpose which qualified it. For example, a hog pen will not be qualifying property if you use it to house poultry. Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property.

If a structure includes work space, that structure is a single purpose agricultural or horticultural structure if the work space is used only for any of the following.

• Stocking, caring for, or collecting livestock or plants or their produce.
• Maintaining the enclosure or structure.
• Maintaining or replacing the equipment or stock enclosed or housed in the structure.

Partial Business Use

When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. You figure the part of the cost of the property that is for business use by multiplying the cost of the property by the percentage of business use. The result is the business cost you use to figure your section 179 deduction.

Example 1. May Oak bought and placed in service an item of section 179 property costing $11,000. She used the property 80% for her business and 20% for personal purposes. The business part of the cost of the property is $8,800 (80% x $11,000).

Example 2. June Pine bought and placed in service computer equipment. She paid $9,000 and received a $1,000 trade-in allowance for her old computer equipment. She had an adjusted basis of $3,000 in the old computer equipment. June used both the old and new equipment 90% for business and 10% for personal purposes. Her basis in the new computer equipment is $12,000 ($9,000 paid plus the adjusted basis of $3,000 in the old computer equipment). However, her business cost for purposes of section 179 is limited to 90% (business use percentage) of $9,000 (cash paid), or $8,100.

Nonqualifying Property

Words you may need to know (see Glossary):

• Adjusted basis
• Basis
• Fiduciary
• Grantor
• Placed in service
• Structural components

Generally, the section 179 deduction cannot be claimed on the cost of any of the following.

• Property you hold only for the production of income.
• Real property, including buildings and their structural components.
• Property you acquired from certain groups or persons.
• Air conditioning or heating units.
• Certain property used predominantly outside the U.S.
• Property used predominantly to furnish lodging or in connection with the furnishing of lodging.
• Property used by certain tax-exempt organizations.
• Property used by governmental units.
• Property used by foreign persons or entities.
• Certain property you leased to others (if you are a noncorporate lessor).

For the kind of property you lease on which you can claim the section 179 deduction, see Qualifying Property, earlier.

Production of Income

Property you hold for the production of income includes investment property, rental property (if renting property is not your trade or business), and property that produces royalties. If you use property in the active conduct of a trade or business, you do not hold it only for the production of income.

Acquired From Certain Groups or Persons

Property does not qualify for the section 179 deduction if any of the following apply.

1. The property is acquired by one member of a controlled group from another member of the same group.
2. The property's basis is determined in either of the following ways.
   1. In whole or in part by its adjusted basis in the hands of the person from whom it was acquired.
   2. Under stepped-up basis rules for property acquired from a decedent.

3. The property is acquired from a related person.

Related persons. For the purpose of determining what property does not qualify for the section 179 deduction, related persons are any of the following.

• An individual and his or her spouse, child, parent, or other ancestor or lineal descendant.
• A corporation and any individual who owns directly or indirectly more than 50% of the value of the corporation's outstanding stock.
• Two corporations that are members of the same controlled group.
• A fiduciary of a trust and a corporation if more than 50% of the value of the outstanding stock of the corporation is owned directly or indirectly by or for the trust or the grantor of the trust.
• The grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
• The fiduciaries or the fiduciaries and beneficiaries of two different trusts if the same person is the grantor of both trusts.
• Certain educational and charitable organizations and any person (including members of the person's family) who directly or indirectly controls the organization.
• A partnership and a person who owns directly or indirectly an interest of more than 50% of the partnership's capital or profits.
• Two partnerships if the same persons directly or indirectly own more than 50% of the capital or profits of each.
• Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.
• Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation.
• A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or profits interest, in the partnership.

Example. Ken Larch is a tailor. He bought two industrial sewing machines from his father. He placed both machines in service in the same year he bought them. They do not qualify as section 179 property because Ken and his father are related persons. He cannot claim a section 179 deduction for the cost of these machines.

Property Used for Lodging

The following types of property used predominantly in connection with the furnishing of lodging can qualify as section 179 property.

• Nonlodging commercial facilities which are available to those who are not using the lodging facilities on the same basis as they are available to those using the lodging facilities.
• Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients.
• The part of the basis of a certified historic structure that is for qualified rehabilitation expenditures.
• Any energy property.

Energy property. Energy property is property that is either of the following.

• Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat.
• Equipment used to produce, distribute, or use energy derived from a geothermal deposit, up to (but not including) the electrical transmission stage.

If you did not construct, reconstruct, or erect the equipment, the original use of the property must begin with you. The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property.

Energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990).

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