What Real Property Qualifies for the Section 179 Deduction?

The Section 179 deduction provides a tax incentive for businesses, allowing for the immediate expensing of certain asset purchases rather than depreciating them over many years. While often associated with machinery, business vehicles, and software, its application extends to specific improvements to nonresidential real property. This provision enables businesses to deduct these costs in the year the improvements are placed in service.

Identifying Qualified Real Property for Section 179

For an improvement to be eligible for the Section 179 deduction, it must be classified as “qualified real property.” This term primarily covers Qualified Improvement Property (QIP), which is any improvement made to the interior of a nonresidential building. The improvement must be placed in service after the building itself was first put into use, meaning the work must be on an existing structure.

In addition to interior QIP, the law allows businesses to elect the Section 179 deduction for other specific improvements to nonresidential real property. These eligible improvements include:

• The installation or replacement of roofs
• Heating, ventilation, and air-conditioning (HVAC) systems
• The installation of fire protection and alarm systems
• Security systems installed on the property

It is important to understand what does not qualify. The definition of QIP specifically excludes expenditures for improvements that enlarge the building, such as an addition. The cost of installing an elevator or escalator is also not eligible. Furthermore, any improvements to the internal structural framework of the building are excluded and cannot be expensed under Section 179.

Monetary Limitations and Key Conditions

The Internal Revenue Code imposes a maximum amount that can be deducted under Section 179 for any given tax year. For 2024, the total deduction is capped at $1,220,000. This limit applies to the total cost of all property—including equipment, vehicles, and qualified real property—that the business elects to expense.

A second threshold is the investment phase-out. For 2024, if a business places more than $3,050,000 of qualifying property into service during the year, the maximum deduction of $1,220,000 is reduced dollar-for-dollar by the amount exceeding the threshold. For instance, if a business places $3,150,000 in property into service, its maximum Section 179 deduction would be reduced by $100,000, down to $1,120,000.

The deduction is also constrained by the business’s financial performance. The total Section 179 expense claimed cannot exceed the business’s aggregate net taxable income and cannot be used to create a net operating loss. If a portion of the deduction is disallowed because of this income limitation, the unused amount can be carried forward to subsequent tax years and deducted then, subject to that future year’s limitations.

Making the Section 179 Election

To claim the deduction, a business must make an election for the tax year the qualified real property is placed in service. The taxpayer needs a detailed description of each property being expensed, its exact cost, and the specific date it was put into use for the business.

The election is made by completing and filing IRS Form 4562, “Depreciation and Amortization.” In Part I of this form, the taxpayer will list the description of the qualified real property and its cost. The form guides the taxpayer through calculating the deduction based on the dollar and taxable income limitations.

Form 4562 must be attached to the business’s federal income tax return for the year the election is being made. This can include a sole proprietorship’s Schedule C, a partnership’s Form 1065, or a corporation’s Form 1120. The return must be timely filed, including any extensions, for the election to be valid.