Architects & Engineers Articles -
Maximizing Depreciation

Code Section 179 Expensing Limits

The American Jobs Creation Act of 2004 allows a Section 179 first year deduction for depreciable recovery property (not real estate) of $100,000 with an investment limitation of $400,000 through 2007. The investment limitation applies once total qualifying property exceeds $400,000, and reduces the $100,000 limit dollar for dollar. The amounts are indexed for inflation, for 2005 the amounts are a $105,000 expense limit and a $420,000 investment limit. For years beginning in 2008, the expense limit will decrease to a $25,000 expense limit and a $200,000 investment limit.

Taxpayers may not elect to expense the cost of property used outside the United States, property used by tax-exempt organizations unless it is used in an activity subject to income tax, property used by governmental units or foreign persons or entities, and property used in connection with lodging (other than hotels, motels and inns).

Off-the-Shelf Computer Software

The Section 179 depreciation deduction is available for off-the-shelf computer software that is placed in service in tax years beginning in 2003, 2004, 2005, 2006, and 2007. Off-the-shelf computer software is defined as computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. However, computer software does not include any database or similar item unless it is in the public domain and is incidental to the operation of otherwise qualifying computer software.

Depreciation for Sport Utility Vehicles (SUVs)

A limited deduction can still be claimed for sport utility vehicles under Section 179 of $25,000. The deduction applies to vehicles that weigh more than 6,000 pounds but less than 14,000 pounds. SUVs will still be allowed the normal depreciation deduction as long as they weigh more than 6,000 pounds. For vehicles that weigh less than 6,000 pounds, they will be subject to much lower luxury auto depreciation limits.

Qualified Leasehold Improvements

Qualified Leasehold Improvements are depreciated over 15 years if placed in service before 1/1/06 using the 150-percent declining balance method and half year/mid quarter convention. This treatment is mandatory and not elective. However, to avoid the 15 year rules you could elect ADS depreciation and use 39 years, but ADS depreciation would have to be used for all 15 year property.

A Qualified Leasehold Improvement (lessee or lessor) is any improvement to an interior portion of nonresidential property. The improvement must be made under a lease, the lease is not between related parties, the building (or that portion) is occupied exclusively by the lessee, and the improvement is placed into service more than 3 years after the date that the building was first placed into service.

The following are not Qualified Leasehold Improvements

• Exterior improvements (roofs, etc.).
• Enlargement of the building.
• Elevators and escalators.
• Improvements to a common area, such as stairways, hallways, lobbies, walkways, and rest rooms.

Bonus depreciation expired December 31, 2004; no additional deductions are available for 2005.

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