Review of Depreciation and
Section 179 Expensing
Depreciation allows recovery of
the capital invested in an asset
over the life of the asset
Section 179 allows immediate
recovery of some or all of the
cost of an asset
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Depreciation (MACRS)
Modified
Accelerated
Cost
Recovery
System
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MACRS Classes of Property
Personal property (not real estate)
• 3-year: breeding hogs and tractor
unit of a semi
• 5-year: cows, computers and office
equipment
• 7-year: machinery and equipment
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MACRS Classes of Property
Real property
• 10-year: single purpose structures
and orchards and groves
• 15-year: field tile and land
improvements
• 20-year: general purpose farm
buildings
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MACRS Classes of Property
Real property
• 27.5-year: residential rental real
estate
• 39-year: nonresidential real
property
• Land is NOT depreciable
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MACRS Depreciation
Year
1st
3-yr. 5-yr. 7-yr. 10-yr.
25.0% 15.0% 10.7% 7.5%
2nd
3rd
4th
37.5% 25.5% 19.1% 13.9%
25.0% 17.9% 15.0% 11.8%
12.5% 16.7% 12.3% 10.0%
5th
0% 16.7% 12.3% 8.74%
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MACRS Depreciation
1. One-half year in the year an
asset is placed in service
2. Takes an extra year to get full
recovery of investment
3. One-half year in the last year
or year of disposition
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Bonus or Additional First-Year
Depreciation
An extra 30% or 50% for new
(not previously used) assets
acquired before 12/31/04
Can elect not to take this bonus
depreciation
Post 9/11 law – expires this year
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Section 179 Expensing
Allows an immediate write-off of
some or all of the cost of
qualifying asset the year it is
placed in service
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Section 179 Expensing –
Qualifying Property
1. Used in active conduct of a
trade or business
Cannot be a personal use,
hobby, or a fixed rental
situation
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Section 179 Expensing –
Qualifying Property
2. Tangible property depreciated
under MACRS rules
(3, 5, 7, 10 and 15-year MACRS)
3. Must be acquired by purchase
or in a trade
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Section 179 Expensing –
Qualifying Property
4. Can be new or used
5. If acquired in a trade, only the
“boot” portion qualifies
Some differences between bonus
depreciation and Section 179
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Section 179 Election
1. Limited by qualifying property
placed in service in year
2. Phased out $1 for $1, if
qualifying property placed in
service exceeds $410,000
($420,000 in ’05)
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Section 179 Deduction
Limited to taxable income of an
active trade or business
before Section 179 expensing
1. Cannot cause a loss
2. Includes wages as well as
business income
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Section 179 Election
Section 179 deduction that is
limited by income can be
carried forward to next tax year
Greater flexibility in making and
revoking election for ’03 and
later year returns
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Tax Management
Deduct now with Section 179
vs. later with MACRS
1. Marginal tax rates – a higher rate
increases value of deduction
2. Time value of money – deduction
now is worth more than one later
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