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Section 179 Expensing FAQs

The Iowa Department of Revenue has received numerous questions from practitioners relating to Section 179 issues for tax year 2016. For tax year 2016, Iowa is conformed with the IRC only as it existed on 1/1/2015. As a result, the Iowa section 179 deduction limit is $25,000, and the Iowa section 179 phase-out begins at $200,000. Generally, the rules for calculating the proper amount of an Iowa section 179 deduction are the same as the rules for calculating a federal section 179 deduction, except for the differences in the dollar limits. For more information on the federal treatment of section 179 deductions see IRS Publication 946, Chapter 2 (https://www.irs.gov/pub/irs-pdf/p946.pdf).

I. General Section 179 Questions

1. If a taxpayer claims federal section 179 expensing, does the taxpayer have to claim Iowa section 179 expensing also?  

Yes. Whatever the taxpayer does for federal purposes, the taxpayer must also do for Iowa purposes. If the amount of the federal section 179 deduction is under the Iowa limits, no additional action is necessary. If the amount of the federal section 179 deduction exceeds the Iowa limits, report the deduction on the IA 4562A and then adjust the section 179 deduction to comply with the Iowa limits.

2. If a taxpayer does not claim federal section 179 expensing, can the taxpayer claim Iowa section 179 expensing?  

No. Whatever the taxpayer does for federal purposes, the taxpayer must also do for Iowa purposes.

3. How are the Iowa section 179 limits determined for a fiscal year filer?  

The federal and Iowa section 179 limits are determined by the starting date of the taxpayer’s fiscal year. If the taxpayer’s fiscal year began in 2015, the taxpayer must claim the same section 179 deduction for federal and Iowa purposes. If the taxpayer’s fiscal year began in 2016, the taxpayer may need to adjust the Iowa section 179 deduction to comply with the Iowa limits.

 4. Does the taxpayer have to claim the same amount of section 179 expensing for Iowa purposes as for federal purposes?  

When an Iowa taxpayer takes a section 179 deduction on their federal return for qualifying property placed into service in a given year, they are required to take a deduction in the same amount, up to the Iowa limit, on their Iowa taxes.

Example A: Taxpayer purchases a $20,000 piece of equipment and places it into service in 2016. Taxpayer claims a section 179 deduction of $20,000 for the full cost of the equipment on the 2016 federal return. Taxpayer is also required to claim a section 179 deduction of $20,000 on the 2016 Iowa return.

Example B: Taxpayer purchases a $30,000 piece of equipment and places it into service in 2016. Taxpayer claims a section 179 deduction of $30,000 for the full cost of the equipment on the 2016 federal return. Taxpayer is also required to claim a section 179 deduction of $25,000 on the 2016 Iowa return (the full amount of the federal deduction up to the Iowa limit). The remaining $5,000 cost of the equipment can ordinarily be depreciated for Iowa purposes using MACRS.

Example C: Taxpayer purchases $300,000 worth of qualifying section 179 property and places all of it into service in 2016. Taxpayer claims a section 179 deduction of $300,000 for the full cost of the property on the 2016 federal return. Since the cost of the qualifying property exceeds the Iowa section 179 phase-out limit, the taxpayer cannot deduct any section 179 property on the Iowa return. However, the taxpayer may depreciate the entire cost of the property for Iowa purposes using MACRS.

Example D: Taxpayer has a fiscal year beginning July 1, 2015. Taxpayer purchases $300,000 worth of qualifying section 179 property and places all of it into service during the fiscal year beginning July 1, 2015. Taxpayer claims a section 179 deduction of $300,000 for the full cost of the property on the federal return. Since the taxpayer’s fiscal year began in 2015, the 2015 limits for the section 179 deduction apply for Iowa purposes. Therefore, taxpayer is also required to claim a section 179 deduction of $300,000 for Iowa purposes for the fiscal year, even if some of this property was placed into service during calendar year 2016.

5. When claiming section 179 expensing, how does the taxpayer select the appropriate averaging convention to depreciate property under MACRS for Iowa purposes?  

Iowa follows the federal rules for determining which averaging convention applies under MACRS. When the mid-month convention does not apply, use the mid-quarter convention if the total depreciable bases of qualifying MACRS property placed in service during the last 3 months of the tax year are more than 40% of the total depreciable bases of all MACRS property placed in service during the entire year. If neither the mid-quarter convention nor the mid-month convention applies, use the half-year convention. Because section 179 expensing may affect the basis of property placed in service and section 179 expensing may differ for Iowa and federal purposes, a taxpayer may be required to use different averaging conventions for federal and Iowa purposes.

Example: For federal purposes, Taxpayer claims a section 179 deduction of $500,000 on the federal return. After applying the federal section 179 deduction, more than 40% of the total depreciable bases of all MACRS property placed in service during the entire year for federal purposes was placed in service during the last 3 months of the tax year. Accordingly, Taxpayer applies the mid-quarter convention for federal purposes.

For Iowa purposes, Taxpayer cannot claim a section 179 deduction because Taxpayer has exceeded the Iowa section 179 limits. Without the section 179 deduction, less than 40% of the total depreciable bases of all MACRS property placed in service during the entire year for Iowa purposes was placed in service during the last 3 months of the tax year. Accordingly, Taxpayer applies the half-year convention for Iowa purposes

II. Section 179 Carryover Questions

1. If a taxpayer has section 179 expensing carried forward from a previous tax year, how does this carryover apply to Iowa in tax year 2016?

A taxpayer retains any section 179 expensing established in a prior year. The amount of carryover section 179 expensing plus any new section 179 expensing claimed in a tax year is subject to the Iowa limits.

Example: Taxpayer has carryover section 179 expensing of $500,000 from tax year 2015. In tax year 2016, taxpayer does not claim any new section 179 expensing. For Iowa purposes, taxpayer may claim $25,000 in carryover section 179 expensing in 2016. The remaining $475,000 in carryover section 179 expensing continues as a carryover into the future.

2. Can a taxpayer change the amount of the section 179 deduction for a previous year for Iowa purposes?

Yes, a taxpayer may change the amount of the section 179 deduction for Iowa purposes if the change is also allowed for federal purposes. The taxpayer must claim the same section 179 deduction for federal purposes and Iowa purposes, within the Iowa limits. To change the amount of the section 179 deduction for a previous year, the taxpayer must amend the federal and Iowa returns for that year, and all other affected years, to reflect the change.

III. Section 179 Pass-Through Entity Questions

Note: The questions in this section involve partnerships and partners. The same concepts generally apply to S corporations and shareholders.

1. Partnership A is an Iowa partnership with two Iowa partners. Partnership A places section 179 property into service during tax year 2016 with a total cost of $50,000. Partnership A claims the federal section 179 deduction for the full $50,000 cost.

A. What is the Iowa tax treatment for Partnership A?

For Iowa purposes, Partnership A is required to take the section 179 deduction up to the Iowa limit of $25,000. Partnership A may depreciate the remaining $25,000 of cost using MACRS.

B. Partnership A passes the section 179 deduction evenly to its two partners. Each partner receives $25,000 in federal section 179 deduction from Partnership A. Neither partner has any other section 179 deductions to claim for the tax year. Therefore, each partner claims the full amount of the deduction passed through for federal purposes. What is the Iowa tax treatment for the partners?

For Iowa purposes, the partnership passes the partnership’s Iowa section 179 deduction of $25,000 evenly to the partners. Each partner receives $12,500 in Iowa section 179 deduction from the partnership. Neither partner has any other section 179 deductions to claim for the tax year. Therefore, each partner must claim the full $12,500 section 179 deduction passed through for Iowa purposes.

2. Partnership B is an Iowa partnership with two Iowa partners. Partnership B places qualifying section 179 property with a total cost of $400,000 into service during tax year 2016. Partnership B claims the federal section 179 deduction for the full $400,000 cost.

A. What is the Iowa tax treatment for Partnership B?

Partnership B is not allowed to claim an Iowa section 179 deduction for tax year 2016 because the total amount of section 179 property Partnership B exceeds the Iowa phase-out limit of $225,000. The partnership may depreciate the $400,000 for Iowa purposes using MACRS.

B. For federal purposes, Partnership B passes the section 179 deduction evenly to its two partners. Each partner receives $200,000 in federal section 179 deduction from Partnership B. Neither partner has any other section 179 deductions to claim for the tax year. Therefore, each partner claims the full amount of the deduction passed through for federal purposes. What is the Iowa tax treatment for the partners of Partnership B?

For Iowa purposes, Partnership B cannot pass through any section 179 deduction to the partners. The partnership may pass through any MACRS depreciation deductions claimed by the partnership.

3. Partnership C is a non-Iowa partnership with no Iowa activity. Partnership C places section 179 property into service during tax year 2016 with a total cost of $500,000. Partnership C claims the federal section 179 deduction for the full $500,000 cost.

A. What is the Iowa tax treatment for Partnership C?

Partnership C has no Iowa activity. Therefore, Partnership C does not file an Iowa partnership return.

B. Partnership C passes $50,000 of the section 179 deduction to an Iowa partner. What is the Iowa tax treatment for this Iowa partner?

For tax year 2016, the Iowa partner is limited to a total section 179 deduction of $25,000 for Iowa purposes. The Iowa partner must adjust the total section 179 deduction on the IA 4562A to comply with the Iowa limit of $25,000. The amount that the Iowa partner received in excess of the Iowa deduction cannot be carried forward and deducted in future years. Partner also cannot depreciate the excess amount using MACRS, even if Partnership C provides information for the partner to calculate depreciation on the partnership’s section 179 property.

4. Partner owns partnership interests in both Partnership D and Partnership E. Partnership D and Partnership E each placed $200,000 in section 179 property into service during tax year 2016. Partner’s pro rata share of section 179 deduction passed through from Partnership D is $10,000. Partner’s pro rata share of section 179 deduction passed through from Partnership E is $15,000.

A. What is the Iowa tax treatment for Partner?

Partner may claim the aggregate $25,000 section 179 deduction passed through from Partnership D and Partnership E. The total cost of section 179 property placed into service by Partnership D and Partnership E does not pass through to Partner for purposes of the Iowa section 179 phase-out limits.

B. Same facts as above, but assume Partner also owns a partnership interest in Partnership F. Partnership F also claimed a section 179 deduction for tax year 2016. Partner’s pro rata share of the section 179 deduction passed through from Partnership F is $20,000. What is the Iowa tax treatment for Partner?

Partner’s total Iowa section 179 deduction is limited to $25,000. The aggregate section 179 deduction passed through to Partner exceeds Iowa’s $25,000 limit. As a result, Partner’s Iowa section 179 deduction is limited to $25,000. The amount that Partner received in excess of the Iowa deduction cannot be carried forward and deducted in future years. Partner also cannot depreciate the excess amount using MACRS, even if the partnerships provide information for the partner to calculate depreciation on the partnerships' section 179 property.

C. Same facts as above, but assume Partner also operates Sole Proprietorship. Sole Proprietorship placed $300,000 in section 179 property into service during tax year 2016. What is the Iowa tax treatment for Partner?

The cost of section 179 property placed into service by Partner during the tax year exceeds the Iowa section 179 phase-out limit of $225,000. Therefore, Partner cannot claim any Iowa section 179 deduction for tax year 2016. Partner may use MACRS to depreciate the $300,000 cost of section 179 property placed into service by Sole Proprietorship. The entire amount of section 179 expensing passed from the partnerships to Partner cannot be carried forward and deducted in future years. Partner also cannot depreciate the pass-through section 179 expensing using MACRS, even if the partnerships provide information for Partner to calculate depreciation on the partnerships’ section 179 property.

5. An Iowa partnership, Partnership G, has a tax year beginning July 1. Partnership G has two partners, who both have a tax year beginning January 1. During the partnership’s tax year beginning July 1, 2015, Partnership G places into service section 179 property with a cost of $500,000. Partnership G claims a section 179 deduction of $500,000 for this property for federal purposes. Partnership G passes the $500,000 section 179 deduction evenly to both partners for the partners’ tax years beginning January 1, 2016.

A. What is the Iowa tax treatment for Partnership G?

The section 179 deduction limits are determined by the first day of the taxpayer’s tax year. The partnership claimed the section 179 deduction for the tax year beginning July 1, 2015. Therefore, the 2015 Iowa section 179 deduction limits apply, and Partnership G is required to claim an Iowa section 179 deduction of $500,000.

B. What is the Iowa tax treatment for the two partners of Partnership G?

The section 179 deduction limits are determined by the first day of the taxpayer’s tax year. Each partner received the pass through section 179 deduction for the tax year beginning January 1, 2016. Therefore, the 2016 Iowa section 179 deduction limits apply, and each partner is limited to $25,000 in Iowa section 179 deductions. The amount that each partner received in excess of the Iowa deduction cannot be carried forward and deducted in future years. The partners also cannot depreciate the excess amount using MACRS, even if Partnership G provides information for the partners to calculate depreciation on the partnership’s section 179 property.