Limits for Section 179 Deduction

• Computers and other office equipment may qualify for a Section 179 deduction. Jupiterimages/Brand X Pictures/Getty Images

  Section 179 deductions allow a business to deduct qualifying purchases on its federal income tax return instead of depreciating them. Businesses may deduct the cost in full, or the costs may be split between Section 179 and depreciable amounts. Section 179 deductions are not available to trusts and estates. Married couples count as one taxpayer, and if filing separately they must allocate the deduction between them. Partnerships and S-corporations are also considered a single entity and the deduction is allocated among partners or shareholders. Section 179 purchases have fixed amounts limiting how much can be deducted per year.

Standard Dollar Limit

• The total Section 179 deduction per taxpayer is subject to a set dollar amount per year. This amount changes at irregular periods. For 2009, the dollar limit was $250,000, which may cover one purchase or multiple items. The taxpayer does not need to take the full amount allowed as a Section 179 deduction. He may choose to deduct part under Section 179 and depreciate part. If a purchase involves a trade-in, only the cash payment portion is allowed under Section 179.

Excess Cost Limit

• The dollar limit is reduced if property purchased exceeds $800,000 for the year. For every dollar over $800,000, the $250,000 limit is reduced by one dollar. As an example, if you purchase $850,000 worth of qualifying equipment, your dollar limit is reduced to a maximum of $200,000. If you purchase more than $1,050,000, you may not take a Section 179 deduction.

Increases to Section 179 Dollar Limit

• Companies in communities defined as distressed areas by the IRS may be able to take a higher Section 179 deduction. Businesses in an enterprise zone or renewal property may deduct the lesser of an additional $35,000 or the cost of qualified property that is also Section 179 qualified. If costs exceed $800,000, the reduction for the amount over $800,000 is only half of the excess amount. For example, if you purchase $850,000 in equipment, your limit would be reduced by only $25,000 instead of the full $50,000 that would apply if not in an enterprise zone.

Disaster Area Limits

• If the business is located in a zone declared a disaster area by the federal government, the dollar limits are increased. The basic dollar limit is increased by the lesser of $100,000 or the cost of qualified property purchased during the year. For amounts over $800,000, the limit is increased by the lesser of $600,000 or the actual cost of qualified property purchased during the year.

Limits on Certain Vehicles

• Purchases of sports utility vehicles or other four-wheeled passenger vehicle that has a rating between 6,000 and 14,000 pounds for the gross weight are limited to $25,000. This does not apply to vehicles that are designed to carry in excess of nine passengers to the rear of the driver's seat or that has a cargo area of six feet or more that is not designed to be accessed from the passenger area.

Business Taxable Income Limit

• After applying the dollar limit, the Section 179 deduction must still pass the business income test. The total cost cannot exceed the taxable income for the business for the year. If a qualifying purchase is not deductible as a Section 179 expense due to failure to pass this test, it may be carried forward and deducted in the following year.