Section 179 allows a taxpayer to make an election to expense eligible tangible property in the year of acquisition as opposed to capitalizing and depreciating over the life of the property. The Pennsylvania Department of Revenue recently issued Informational Notice 2012-05, which explains how to apply the rules of Section 179 of the Internal Revenue Code to claim a deduction for Pennsylvania Personal Income Tax.
In order to take a Section 179 deduction for Pennsylvania purposes, the election must be initially made at the federal level. The expensed property must satisfy all applicable federal rules and limitations. Section 179 property that is elected to be expensed at the federal level must also be expensed for Pennsylvania. The federal deduction limitation for 2012 is $125,000. However, Pennsylvania limits the deduction to $25,000 per year.
The cost basis of Section 179 property is reduced by the amount of the Section 179 expense elected for that property. Because there are different federal and Pennsylvania expense limitations, the remaining basis will be different for federal and Pennsylvania purposes when the federal expense election exceeds $25,000. Assets with a different remaining basis must be depreciated using the straight-line method over the tax life.
A taxpayer may only deduct Section 179 expenses to the extent of income from an active trade or business (“taxable income limitation”). Section 179 deductions cannot create a loss for federal purposes, but may create a loss for Pennsylvania purposes. For example, a taxpayer with federal trade or business income of $20,000 also makes an election to expense Section 179 property of $20,000 (net federal income of zero). For Pennsylvania, business income is $15,000 due to $5,000 meals and entertainment expense, which is deductible for Pennsylvania purposes. The taxpayer is required to expense the same Section 179 property of $20,000 (results in a Pennsylvania loss of $5,000). The loss may not be carried forward to future years. Section 179 deductions not allowed due to income limitation may be carried forward to future years. A taxpayer will be allowed to use a carry-forward in a year that the Section 179 expense is less than $25,000, or no Section 179 assets are placed in service.
© 2012 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.