Revisiting Post-JGTRRA sec. 179.

• Author: Broadnax, Frank E.
• Position: Jobs and Growth Tax Relief Reconciliation Act of 2003

The expensing election under Sec. 179 was overhauled by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). For tax years beginning in 2003-2005, the annual deduction limit and the qualifying investment limit were increased substantially; thus, more small businesses should qualify for the deduction. The Joint Committee on Taxation has estimated that these changes will provide about $8 billion of tax relief over the three-year period; see Joint Committee on Taxation, "Estimated Budget Effects of the Conference Agreement for H.R. 2, The 'Jobs and Growth Tax Relief Reconciliation Act of 2003,' Fiscal Years 2003-2013" (5/22/03). Thus, it is a good trine to review the basic rules and some planning strategies.

JGTRRA Changes

Under Sec. 179(d)(1), tangible personal property and off-the-shelf computer software purchased and used in the active conduct of a taxpayer's trade or business are now eligible for the election. "Off-the-shelf" computer software is that which is readily available for purchase by the public, has not been altered substantially and is subject to a nonexclusive license. Previously, the cost of such software had to be amortized over 36 months.

The Sec. 179(b)(1) annual deduction ceiling increased from $25,000, to $100,000 for 2003 and to $102,000 for 2004. The Sec. 179(b)(2) investment ceiling increased from $200,000, to $400,000 for 2003 and to $410,000 for 2004; see Temp. Kegs. Sec. 1.179-2T. Both the $102,000 and $410,000 ceilings will be indexed for inflation for 2005.

Other Rules

Phaseout: To the extent a taxpayer exceeds the investment limit for any tax year, the maximum allowable Sec. 179 deduction for that year phases out, dollar for dollar. Thus, if the qualified property placed in service in 2004 equals or exceeds $512,000, no Sec. 179 election would he available. The disallowed amount is capitalized and depreciated, and is not carried over to succeeding years.

Income limit: The taxable income limit has not changed; under Sec. 179(b)(3) and Regs. Sec. 1.179-2(c)(1), the deduction is limited to taxable income, computed without the Sec. 179 deduction, any net operating loss carryback or carryforward and the deduction for one-half of self-employment tax. However, for S corporations and partnerships, taxable income as reported on the entity's tax return can be increased for a shareholder-employee's compensation and guaranteed payments, for purposes of this limit.

Carryforward: According to Sec. 179(b)(3)(B)...