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New Tax Law Increase Business Deduction
- Maximum Deduction Increased to $125,000. For tax years beginning in 2007, the maximum Section 179 deduction is generally increased to $125,000 (up from the $112,000 figure that applied before the new law). For tax years 2008 through 2010, the $125,000 amount will be indexed for inflation.
- Liberalized Phase-Out Rules. If a taxpayer adds qualifying property (typically equipment and software) in excess of the annual threshold, the maximum Section 179 deduction for the year gets reduced (phased out). For tax years beginning in 2007, the phase-out threshold is generally increased to $500,000 of qualifying property (up from the $450,000 threshold that applied before the law). The $500,000 amount will be indexed for inflation for tax years 2008 through 2010.
- Most Software Qualifies for the Deduction. The provision that allows Section 179 deductions for the cost of most off-the-shelf software products is extended through the 2010 tax year.
- Favorable Amended Return Rules Extended. A provision that allows Section 179 elections to be changed or revoked on amended returns is extended through tax years beginning in 2010.
Key Point: Unless Congress takes further action the unfavorable "old-law" rules will kick back in starting with tax year 2011. Under the old-law rules, the maximum annual Section 179 deduction will fall back to $25,000. The deduction phase-out threshold will decrease to only $200,000. Software costs will be ineligible, except for software that is bundled with qualifying hardware. Finally, taxpayers will not be allowed to change or revoke Section 179 elections on amended returns.
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