ALTB 04-03 Combing the 30%/50% Special Depreciation Allowance with
the IRC §179 Expensing Allowance
For taxpayers who make qualifying purchases, it is possible to use both the §179 expensing deduction
and the special depreciation allowance (SDA). This article discusses some limitations and shows examples
of how this can maximize tax depreciation, with a special focus on agricultural applications.
Related Articles Readers will want to read the articles on the §179 expensing
election and the special depreciation allowance before continuing, since the rules stated in the articles
apply to the combined use. Clicking on the following links will take you to the articles regarding the
§179 deduction and the 50% special depreciation allowance: the article on §179 deduction is
available here and the article on the 50% special depreciation
allowance is available here.
The §179 deduction is claimed before taking the SDA.
Example 1 Sally purchases a $200,000 combine that qualifies for both the §179 deduction
and the SDA. She must claim the §179 deduction first. Assuming she only qualifies for a maximum
§179 deduction of $50,000, she will claim that deduction. This reduces the basis in the combine
to $150,000. She can then claim a $75,000 SDA or 50% of $150,000. This allows Sally to take a $125,000
deduction on her $200,000 purchase.
Sally must understand why she is limited to the $50,000 §179 deduction. If it is because of the
income limitation, she will not be able to claim the SDA. Each dollar of SDA reduces her profit, which
reduces her §179 limit.
If Sally is limited in her §179 deduction because of excess purchases over $400,000, she will
be able to claim both deductions. In addition, Sally will also be able to claim regular MACRS depreciation
on the remaining basis of $75,000.
Caution State law may differ from federal law. Therefore, Sally will want to check
her state regulations before claiming either the §179 deduction or the SDA on her federal return.
Many states have applied lower limits to these deductions.
A taxpayer may have multiple asset purchases during the year. Some of these purchases may qualify for
the 30% SDA, others for the 50% SDA and some may qualify for neither. However, most will qualify for
the §179 expensing election. A taxpayer will want to compute the amount of tax deduction desired
and then choose the assets and depreciation technique he wishes to use.
Example 2 Justine purchased the following assets in 2003. Justine’s net farm
profit before calculating any §179 or SDA is $500,000.
||Qualifying for IRC §179?
||Qualifying for 30% SDA?
||Qualifying for 50% SDA?
|New tractor acquired 5/7/2003 for $85,000
|Used wagon acquired 4/3/2003 for $800
|New trailer acquired 5/1/2003 for $2,000
|Farm machine shed acquired 7/10/2003 for $90,000
||NO this is considered real property
|New combine acquired 9/9/2003 for $200,000
|Commercial building acquired 11/6/2003 for $300,000
Justine has $285,800 of purchases qualifying for §179. If she wishes to maximize her depreciation
deduction, she will want to elect §179 on the wagon and the trailer since they will not qualify
for the 50% SDA. In addition, she should claim an additional $97,200 of §179. She may elect to
take the remaining §179 deduction on the combine, leaving it with a basis of $102,800.
When she aggregates the remaining combine basis with the cost of the tractor and the machine shed, she
has $277,800 of assets that qualify for the 50% SDA deduction. Therefore, she has an SDA deduction of
Justine reduced her net farm income by $241,700. She also has the regular MACRS depreciation on the
remaining basis of the combine, tractor, machine shed and commercial building.
Justine needs to understand the consequence is her depreciation deduction in future years will be severely
Justine may want to reduce her depreciation deduction if she does not have enough earned income (farm
income, business income, and wages) to use all of the §179 deduction. In addition, Justine needs
to understand how her state treats the §179 deductions and the SDA.
For example, Illinois requires the taxpayer to make a modification for SDA, but they allow the entire
§179 amount. Indiana and Ohio require adjustments for both the SDA and §179 deduction.