Fence – Section 179 Deduction?

[Greenblue]

I installed a fence on land that I lease out for grass/cattle (reported on Schedule E as passive income). I thought that I qualified for a Section 179 deduction (take 100% depreciation).  However, Pub 946 and 225 have an exception: 

Generally, you cannot claim a section 179 deduction if you lease the property to someone else. This rule does not apply to corporations.  IRS Pub 946

Since I lease the land out and I am not a corporation, my fence does not qualify for special depreciation? I will end up depreciating over 7 years and report on Form 4562, Part III MACRS?

Am I missing anything? 

[soultax09]

It applies to stuff like machinery and equipment and whatever that is used in a trade or business so you're not missing anything.

[Greenblue]

One tax nuance that I may have overlooked is taking the "100% Bonus."  I think that the fence qualifies for the 100% bonus depreciation and would be reported on Form 4562 Part II Line 14.

[WillK]

Yes, you can deduct the entire cost of the fence using the 100% bonus depreciation rules.

CAUTION: Please keep in mind that most states do not recognize the IRS rules allowing bonus deprecation so you may have to depreciate the fence as a land improvement on your state tax return (generally over 7 years if reported as farm land improvement on Schedule F or over 15 years if reported as a rental property on Schedule E).   

As you mentioned in your original post, Publication 946 does correctly state that the fence does not qualify for the Section 179 deduction but it is not because you lease out the land, it is because land improvements do not qualify for the Section 179 deduction. Per page 17 of Pub. 946, "Land and land improvements do not qualify as section 179 property. Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences".  

The portion of Pub 946 that you referenced, "Generally, you cannot claim a section 179 deduction if you lease the property to someone else." only applies to property you purchase in order to lease that same property to someone else (for example, if you buy a tractor for the purpose of leasing it to the cattle farmer, that tractor is not eligible for the Section 179 deduction).   

The 100% bonus depreciation rules are much more flexible.   

The Tax Cuts and Jobs Act, signed into law in late 2017, allows businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service (it was formerly limited to 50% of eligible property).   

To qualify as eligible property, the property must be one of the following:

• MACRS property that has a recovery period of 20 years or less;
• computer software as defined in, and depreciated under, section 167(f)(1);
• water utility property as defined in section 168(e)(5) and depreciated under section 168;
• a qualified film or television production as defined in section 181(d) and for which a deduction would have been allowable under section 181 without regard to section 181(a)(2) and (g) or section 168(k);
• a qualified live theatrical production as defined in section 181(e) and for which a deduction would have been allowable under section 181 without regard to section 181(a)(2) and (g) or section 168(k); or
• a specified plant as defined in section 168(k)(5)(B) and for which the taxpayer has made an election to apply section 168(k)(5).

As the fence is MACRS property with a recovery period of less than 20 years, it would qualify for 100% bonus depreciation.

More information regarding what property qualifies for bonus depreciation can be found at https://www.irs.gov/pub/irs-drop/td-9874.pdf.