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Section 179 Expensing - Federal and Iowa Treatment for Tax Year 2016

This guidance was reissued on February 20, 2017, based on feedback received from Iowa tax preparers. This guidance contains the most accurate and up-to-date information from the Department. This guidance supersedes and replaces any previous guidance issued by the Department.

Section 179 Expensing Generally

Under section 179 of the Internal Revenue Code, taxpayers can deduct from their federal income tax the cost of qualifying property used in a trade or business in the year the property was placed in service. This allows businesses to deduct the cost of qualifying tangible personal property purchased for business use in one year, rather than deducting the cost of the tangible personal property over a number of years using depreciation. More information on the federal treatment of section 179 deductions may be found on the Internal Revenue Service’s website. The Iowa section 179 deduction operates in the same manner as the federal section 179 deduction. 

Iowa taxpayers must show all Iowa adjustments for section 179 expensing and section 168 bonus depreciation on the IA 4562A.

Annual Section 179 Deduction Limit

Taxpayers are allowed a deduction of the total cost of all qualifying section 179 property placed in service during the tax year, subject to the maximum deductions and phase-outs shown in the chart below. If a taxpayer claims a section 179 deduction for federal purposes, the taxpayer must claim a section 179 deduction in the same amount for Iowa purposes, subject to the Iowa maximum deduction and phase-out.

Section 179 Allowances under Federal and Iowa Law

Tax Year

Federal

Iowa

 

Maximum deduction

Start of phase-out

Maximum deduction

Start of phase-out

2003

$100,000

$400,000

$100,000

$400,000

2004

102,000

410,000

102,000

410,000

2005

105,000

420,000

105,000

420,000

2006

108,000

430,000

108,000

430,000

2007

125,000

500,000

125,000

500,000

2008

250,000

800,000

250,000

800,000

2009

250,000

800,000

133,000

530,000

2010

500,000

2,000,000

500,000

2,000,000

2011

500,000

2,000,000

500,000

2,000,000

2012

500,000

2,000,000

500,000

2,000,000

2013

500,000

2,000,000

500,000

2,000,000

2014

500,000

2,000,000

500,000

2,000,000

2015

500,000

2,000,000

500,000

2,000,000

2016

500,000

2,010,000

25,000

200,000

Section 179 Phase-out

For tax year 2016, the amount of the section 179 deduction allowed is reduced dollar for dollar by the cost of property placed in service over $2,010,000 for federal purposes and over $200,000 for Iowa purposes. Because of the phase-out, a taxpayer cannot claim a section 179 deduction on their 2016 Iowa return if the total cost of all qualifying section 179 property placed in service during the tax year is $225,000 or more. 

The following table provides examples of how the phase-out affects the amount of the deduction available for Iowa purposes.

Section 179 Iowa Phase-out

Total Cost of the Section 179 Property

Total Iowa Deduction Allowed for Tax Year 2016

$200,000 or less

$25,000

$205,000

$20,000

$210,000

$15,000

$215,000

$10,000

$220,000

$5,000

$225,000 or more

$ 0

If a taxpayer does not claim a section 179 deduction for the entire cost of all qualifying section 179 property placed in service during the tax year, the taxpayer can generally depreciate the cost not deducted under section 179 using the Modified Accelerated Cost Recovery System (MACRS) under section 168 of the Internal Revenue Code.

Carryover

The section 179 deduction for a given year is also limited to a taxpayer’s income from active conduct in a trade or business. Allowable section 179 deductions claimed in a given year that exceed a taxpayer’s business income may be carried forward and claimed in future years. The amount of section 179 carryover plus any new section 179 deductions claimed in a given year is subject to the maximum deductions and phase-outs shown above.

Pass-Through Entities

The Iowa section 179 dollar limit of $25,000 applies to the partnership as well as to each partner. The partner’s allowable Iowa section 179 deduction of $25,000 is based on the aggregate of all of the partner’s own available section 179 deductions and all section 179 deductions passed through to the partner from all sources. A partner may not claim more than $25,000 in Iowa section 179 deductions on the Iowa 1040 in a tax year regardless of the source.

A partner’s pass-through section 179 deduction is shown on the partner’s K-1 from the partnership. If a partner receives more than the Iowa limit of $25,000 in section 179 deductions from pass-through entities, the partner must adjust his or her section 179 deduction on the IA 4562A to comply with the Iowa limit.

The cost of section 179 property the partnership places into service during the tax year does not pass through to the partner for purposes of applying the phase-out limits. For purposes of applying the phase-out limits at the partner level, the partner includes any section 179 property the partner personally places into service during the tax year. The partner does not include the cost of section 179 property that the partnership places into service during the tax year for purposes of determining whether the partner exceeds the Iowa section 179 phase-out limit.

The partner’s basis of his or her partnership interest is reduced by the amount of the section 179 deduction passed through from the partnership to the partner, even if the partner is not allowed to claim the full deduction passed through for Iowa purposes. The partner may not deduct any amount of section 179 expensing passed through that exceeds the $25,000 Iowa limit. The partner’s basis of his or her partnership interest may be different for Iowa and federal purposes.

The same concepts generally apply to an S corporation and each of its shareholders.