Can You Take Section 179 on Land Improvements?

The Section 179 deduction allows businesses to deduct the cost of certain assets in the year they are placed into service rather than depreciating them over time. This tax benefit encourages investment in equipment and property improvements that support business operations. However, not all expenses qualify, and land-related costs often fall into a gray area.

Understanding which land improvements meet the criteria for Section 179 can help businesses maximize deductions while staying compliant with IRS rules.

When Land Additions Are Eligible

Land itself is not eligible for Section 179 deductions because it is considered a non-depreciable asset under IRS rules. However, certain improvements may qualify if they function as tangible personal property or are part of a qualifying business asset. The key factor is whether the improvement is permanently affixed to the land or serves a business function beyond increasing property value.

The IRS determines eligibility based on whether an improvement is subject to wear and tear, has a determinable useful life, and is used in an active trade or business. Structures that are not buildings, such as modular office units or certain storage facilities, may qualify if they are not permanently attached to the ground. Utility installations that support business operations could also be eligible if classified as personal property rather than real estate.

While land improvements are generally depreciable under the Modified Accelerated Cost Recovery System (MACRS), not all qualify for Section 179. Improvements with shorter recovery periods under MACRS may be eligible if they meet the definition of qualifying property.

Land Enhancement Items Often Considered

Certain land improvements may qualify for Section 179 if they serve a business function beyond increasing property value. These enhancements must be tangible, subject to wear and tear, and used in an active trade or business.

Fences

Fencing installed for business purposes is typically depreciable but not eligible for Section 179. The IRS classifies fences as land improvements under MACRS, assigning them a 15-year recovery period under the General Depreciation System (GDS). This means they must be depreciated over time rather than deducted in full in the year of purchase.

However, agricultural businesses may be able to deduct fencing costs under Section 179 if the fence is used in farming operations. The Tax Cuts and Jobs Act (TCJA) of 2017 reclassified certain farm property, including fences, as eligible for a shorter depreciation period, making them more favorable for immediate expensing. To qualify, the fencing must be directly related to business operations, such as enclosing livestock or securing a commercial facility.

If Section 179 does not apply, businesses may still benefit from bonus depreciation, which allows for a significant first-year deduction. As of 2024, bonus depreciation is set at 60%, meaning a business could deduct 60% of the fence’s cost in the first year and depreciate the remaining amount over the standard recovery period.

Roadways and Parking

Paved surfaces such as driveways, parking lots, and private roads are considered land improvements and assigned a 15-year depreciation period under MACRS. These assets do not typically qualify for Section 179 because they are considered permanent improvements to real property rather than tangible personal property.

However, certain parking structures or temporary roadways may be eligible if they are not permanently affixed to the land. A modular parking surface or a temporary access road for a construction project, for example, may qualify if the asset is removable and used in active business operations.

For businesses that cannot use Section 179, bonus depreciation may still provide tax benefits. If a company installs a new parking lot in 2024 for $100,000, it could claim 60% bonus depreciation ($60,000) in the first year and depreciate the remaining $40,000 over the next 14 years.

Additions for Drainage

Drainage systems, such as culverts, retention ponds, and underground piping, are often necessary for managing water flow on commercial or agricultural properties. These improvements are typically classified as land improvements under MACRS and assigned a 15-year depreciation period, making them ineligible for Section 179 in most cases.

However, certain drainage-related assets may qualify if they are considered part of a business’s operational equipment rather than a permanent land improvement. A portable drainage system for a construction site or a temporary irrigation system for seasonal farming may be eligible if the asset is removable and used in active business operations.

For businesses that do not qualify for Section 179, bonus depreciation can still provide a tax advantage. If a company installs a $50,000 drainage system in 2024, it could deduct 60% ($30,000) in the first year and depreciate the remaining $20,000 over the next 14 years.

Deduction Claim Steps

Maximizing a Section 179 deduction requires verifying that an asset meets IRS requirements, including classification as tangible personal property and use in an active trade or business. Since land-related improvements can be complex, businesses should review IRS guidance, such as Publication 946, which outlines property eligibility and depreciation rules. Consulting a tax professional can help clarify whether an improvement qualifies before making the purchase.

The asset must be placed into service within the same tax year the deduction is claimed. The IRS defines “placed in service” as the date an asset is ready and available for its intended business use, not necessarily when it was purchased. If a business buys equipment in December but does not install it until January, the deduction must be claimed in the following tax year. Proper documentation, such as invoices, installation records, and usage logs, helps substantiate the deduction in case of an IRS audit.

Filing for the deduction requires completing Part I of Form 4562, where businesses report the cost of qualifying assets and elect Section 179 treatment. The total amount deducted cannot exceed the annual limit, which is indexed for inflation and set at $1.22 million for 2024. Additionally, businesses must stay within the phase-out threshold, which begins at $3.05 million in total asset purchases for the year. If a company exceeds this amount, the deduction is reduced dollar-for-dollar until it is completely phased out at $4.27 million. These limits highlight the importance of timing capital expenditures strategically to maximize tax savings.