Written by David M. Hanson, CPA
The Section 179 Deduction – A Review
Federal tax law generously allows eligible taxpayers the opportunity to write off, i.e., take a tax deduction, for up to $500,000 of the purchase cost of equipment and certain building structure. If the taxpayer has sufficient taxable income without taking this deduction into account, the deduction may be taken all in one year if the taxpayer so chooses. The name for this deduction, the “Section 179 Deduction” is a reference to the particular part of the Internal Revenue Code where this law provision is written. The Section 179 deduction is essentially accelerated depreciation. If a taxpayer chose not to claim the Section 179 deduction in any given year, then the property to which the Section 179 deduction would otherwise have applied is depreciated over its normal depreciable life (3 years, 5 years, 7 years, etc. depending on the type of property).
The Section 179 deduction has a fairly long history. While its roots go all the way back to 1958, the current structure of this code section is to allow the one-time up-front deduction as described in the preceding paragraph. What’s interesting about this law provision, and the amount of the deduction in particular, is that the deduction has steadily come into greater favor with Congress over the years. Specifically, back in 1982, the amount was capped at $5,000; in 2017 the amount is set at $500,000 !
State of Iowa’s View
As a general rule, Iowa tax law “piggybacks” or is coupled with federal law. In other words, whatever tax provisions the federal government puts into place the State of Iowa will follow suit, until now.
Late in 2015 the federal government changed federal tax law to make the Section 179 deduction equal $500,000. Normally, and generally consistent in prior years, the State of Iowa would follow suit and change its limit to $500,000 also. However, in January of 2016, Governor Branstad announced that the State of Iowa was not going to go along with the federal change; rather, Iowa’s limit for the Sec. 179 deduction was going to be $25,000 !
Only after severe lobbying pressure from many groups throughout Iowa did the Governor change his mind and agree to the $500,000 limit for Iowa tax purposes. However, there was a catch; the agreement only covered tax year 2015 and no future years without action by the Iowa Legislature. So, as things stand now, for tax year 2016 and future years the Iowa Section 179 limit stands at $25,000. What does this mean for the average taxpayer ? It means that while they will be able to take an up-front federal tax deduction of up to $500,000, for Iowa they will be limited to an up-front tax deduction of $25,000; the remainder of $475,000 is not lost fortunately. Rather, the taxpayer will have to depreciate the $475,000 as described above in paragraph one.
Where Do We Go From Here ?
Throughout the first months of 2017, taxpayers and other interested parties have vigorously lobbied the Iowa legislature to change the Iowa law. So far, no luck. Numerous legislative bills have been drafted by various legislators seeking to change the Iowa law but none have “gotten legs”. In fact, a current bill before the legislators seeks to put a complete end to the debate for 2016 and in essence tell all those who wish otherwise to “give it up”. So, in this author’s opinion, the best chance is to hope for legislative action sometime later in 2017 or early 2018 that will change the result for the 2017 tax year and years going forward.
As is usually the case with the tax law, there are many variables and nuances to consider in each taxpayer’s situation. Consequently, seeking the advice of an experienced, qualified tax professional is highly recommended.