Increased Section 179 Deduction

What assistance is available to businesses located in an EZ or RC for equipment purchases?
The tax code allows a Renewal Community Business to take an additional expense deduction of up to $35,000 after December 31, 2001, on purchases of tangible personal property (equipment) for use in a RC.

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 writeoff 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 to 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 a RC.  The taxpayer acquired the property by purchase after the date of RC designation. Original use of the property in a RC commences with the taxpayer (that is, the taxpayer is the first person to use the property inside a 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 do the expensing phase-out limits 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 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 instructions, for QRP. A business should consult with its tax advisor.