Specialist US UK tax services: Capital Allowances vs Sec. 179

An American sole trader or partner in a UK business usually deducts new equipment in full on the UK return through the annual investment allowance, but must spread the same cost straight line on the US return, with no section 179 expensing and no bonus depreciation. Reconciling the two is core work for Specialist US UK tax services.

The consequence is two profit figures for one trade that disagree every year an asset is owned. At Jungle Tax we prepare both returns for consultants, medical and dental practitioners, manufacturers and hospitality owners who are US citizens or green card holders trading in the United Kingdom, and the plant and equipment schedule is one of the places where a carefully prepared UK return most often produces an incorrect US one. This guide sets out how each system relieves the cost, where the figures sit on each return, what the divergence does to the foreign tax credit, and how to put right years in which the UK figure was simply carried across. It deals with plant, equipment and vehicles used in a trade; buildings and fixtures in let property follow different rules and are outside its scope.

Why does the same asset produce two different deductions?

The United Kingdom does not allow accounting depreciation as a deduction. Depreciation charged in the accounts is added back and statutory capital allowances are given in its place. For an owner-managed trade, those allowances are heavily front-loaded: in most cases the whole cost is relieved in the period of purchase.

The United States starts from the opposite position. Depreciation is the deduction, and the accelerated reliefs that American business owners read about — section 179 expensing and the special depreciation allowance, commonly called bonus depreciation — are both withdrawn where the property is used predominantly outside the United States. What remains is the Alternative Depreciation System (ADS) under section 168(g) of the Internal Revenue Code: straight line, over a recovery period that is generally longer than the domestic one.

Neither answer is wrong. Each is the correct result under its own law, and the preparation task is to keep two asset registers for the same equipment, in two currencies, for as long as the assets are held.

How does the UK return relieve plant and equipment in an unincorporated business?

Annual investment allowance

The annual investment allowance (AIA) gives a 100% deduction for qualifying plant and machinery up to £1,000,000 for a twelve-month period, with the limit scaled for shorter or longer periods. Three conditions matter for the readers of this guide:

• Who may claim. Individuals may claim, as may partnerships whose members are all individuals. A partnership that includes a company among its members is not entitled to the AIA, which is a point to check before assuming the usual treatment in a mixed professional partnership.
• Cars are excluded. Vans, lorries and motorcycles can qualify; cars cannot.
• Prior use is excluded. An asset owned privately and later introduced to the business does not attract the AIA, although its value can enter a pool.

Writing-down allowances in the main and special rate pools

Expenditure not covered by the AIA or a first-year allowance goes into a pool and is relieved on a reducing balance. HMRC's rates and pools guidance confirms that the main pool rate fell from 18% to 14% from 6 April 2026 for income tax, and that the special rate pool remains at 6%. A period of account that includes the date of change requires a hybrid rate, which is a detail many computations for periods straddling April 2026 miss.

• Main pool: most equipment, tools, computers, furniture and commercial vehicles.
• Special rate pool: long-life assets, integral features, thermal insulation and higher-emission cars.
• Small pools: where the balance of the main or special rate pool is £1,000 or less before the allowance is calculated, the whole balance may be written off.
• Short-life assets: an election can place a main-pool asset in its own pool so that a balancing allowance arises if it is disposed of within eight years.

First-year allowances, and why full expensing is not available

Full expensing, which is the relief most often quoted in the financial press, is available only to companies within the charge to corporation tax. A sole trader or a partnership of individuals cannot claim it. In practice the AIA delivers the same first-year outcome for almost every unincorporated business, because few spend more than the limit in a year.

The first-year allowances that are open to an unincorporated business are narrower. The principal one is the 100% allowance for cars that are new, unused and either electric or have zero carbon dioxide emissions, which HMRC guidance currently shows as available for purchases before April 2027. A separate 40% first-year allowance for certain new main-rate plant was introduced in 2026; where the AIA already covers the expenditure it adds nothing, and its conditions should be confirmed against current guidance before it is relied on.

Cars and private use

Cars sit outside the AIA and are relieved according to emissions. Under the business cars rules for cars bought from April 2021, a new zero-emission car attracts the 100% first-year allowance, a car with emissions of up to 50g/km (or a second-hand electric car) goes to the main rate, and a car above 50g/km goes to the special rate.

Any asset used partly for private purposes by the proprietor or a partner — most commonly the car — is kept in its own single asset pool. The allowance is calculated in full, the pool is reduced in full, but only the business proportion is deducted from profit. Simplified mileage rates are an alternative to capital allowances for a vehicle, but once capital allowances have been claimed on a vehicle the mileage method is not available for it.

Balancing charges on disposal

When a pooled asset is sold, the proceeds (limited to original cost) are deducted from the pool. If the proceeds exceed the balance, the excess is a balancing charge and is added to trading profit. Because the AIA has usually reduced the pool to nil, the sale of almost any piece of equipment produces a charge equal to the whole of the proceeds. HMRC's helpsheet HS252 sets out the mechanics, including the balancing allowance available when a single asset pool is closed or the business ceases.

The cash basis, in one sentence

Where the trade's profits are calculated on the cash basis, the cost of equipment is deducted as an expense when paid and capital allowances are not claimed at all, with the single exception of cars.

Where the figures sit on the UK return

A sole trader reports capital allowances and balancing charges in the dedicated section of the full self-employment pages of the self assessment return, with separate entries for the AIA, main pool allowances, special rate pool allowances, zero-emission car allowances and balancing charges. In a partnership, the claim is made once on the partnership return, and each partner's share of the resulting profit is carried to the partnership pages of the individual return. A partner does not make a separate capital allowances claim for partnership assets.

How does the US return treat the same equipment?

Why the Alternative Depreciation System is mandatory

Tangible property used predominantly outside the United States during the tax year must be depreciated under ADS. This is a requirement, not an election, and it applies irrespective of the relief HMRC has already given. IRS Publication 946 lists the category alongside the other cases of required ADS use. For equipment that never leaves a UK clinic, kitchen or workshop the test is not in doubt.

No bonus depreciation

The special depreciation allowance has been restored to 100% for qualifying property acquired and placed in service after 19 January 2025. Publication 946 is equally clear that property required to be depreciated under ADS is excepted property for this purpose. The headline does not reach a UK trade.

No section 179 expensing

We have checked this point against the IRS text because it is frequently stated loosely. In its list of excepted property for the section 179 election, Publication 946 includes property used predominantly outside the United States, other than property described in section 168(g)(4). That statutory carve-out covers a short list of specialised items — broadly, certain transport and communications assets operated to and from the United States — and does not describe the equipment of an ordinary UK trade. The generous dollar limit published each year for section 179 is therefore irrelevant to a UK-based sole trader or partnership.

ADS recovery periods, method and convention

• Method: straight line in every case.
• Recovery period: generally the asset's class life in the IRS tables. By way of illustration, cars and computers are recovered over five years under ADS, office furniture over ten, and personal property with no class life over twelve. Trade-specific equipment takes the class life of the activity in which it is used, so a restaurant, a medical practice and a manufacturer can have different periods for superficially similar items.
• Convention: the half-year convention normally applies, giving half a year's deduction in the first and final years. Where more than 40% of the year's depreciable additions are placed in service in the last three months of the tax year, the mid-quarter convention applies instead.
• Tax year: the US year is the calendar year, so an asset bought in February falls in one UK tax year and a different US one from an asset bought in May.

The de minimis safe harbor for low-cost items

The one piece of first-year relief that does survive foreign use is the de minimis safe harbor under the tangible property regulations. A business without an applicable financial statement may elect to deduct items costing up to $2,500 per invoice or item, provided it follows a consistent expensing practice in its books. The election is made annually by a statement attached to a timely filed original return, including extensions. That timing condition deserves attention in catch-up work, because it is generally not available on a late or amended return.

Listed property and cars

Passenger vehicles are listed property. Business use must be substantiated with contemporaneous records, the business-use percentage limits the deduction, and annual dollar caps on passenger automobile depreciation apply regardless of method. Those caps are indexed each year and should be taken from the current Form 4562 instructions. A vehicle used 50% or less for business must use ADS in any event, so for a UK-based car the foreign-use rule and the listed property rule arrive at the same place.

Form 4562 and where the deduction lands

Depreciation is computed on Form 4562, with ADS assets entered in the dedicated ADS section and vehicles in the listed property part. For a sole trader the total flows to Schedule C. For a partner it is computed at partnership level, as described below.

Sterling cost and the spot rate

US basis is established in dollars at the spot rate on the acquisition date and is not retranslated. Each year's depreciation is a fixed fraction of that historic dollar cost. This is different from the treatment of the trade's income and running expenses, which are ordinarily translated at an average rate for the year, and it is the reason a US depreciation schedule cannot be produced by converting a sterling figure at year end.

Recapture on sale under section 1245

On disposal, gain is measured against dollar basis reduced by depreciation allowed or allowable. Gain up to the depreciation taken is ordinary income under section 1245 and is reported on Form 4797. The phrase “allowed or allowable” matters: basis is reduced by the depreciation that should have been claimed even if none was.

US versus UK treatment at a glance

Feature	UK (HMRC) — unincorporated trade	US (IRS) — asset used predominantly in the UK
First-year relief on equipment	AIA: 100% up to £1,000,000	None beyond the normal first-year ADS fraction
Expensing election	Not required; AIA is claimed on the return	Section 179 not available
Bonus or first-year allowance	100% for new zero-emission cars; full expensing for companies only	Special depreciation allowance not available
Ongoing relief	14% main pool, 6% special rate pool, reducing balance	Straight line over the ADS recovery period
Low-cost items	Covered by the AIA; small pools write-off at £1,000	De minimis safe harbor election, $2,500 per item without an applicable financial statement
Cars	No AIA; rate set by emissions; private use restricted	Listed property; five-year ADS; annual dollar caps; business-use substantiation
Asset tracking	Pooled; individual assets lose their identity	Asset by asset
Currency	Sterling	Dollars at the acquisition-date spot rate
Tax year	6 April to 5 April	Calendar year
On disposal	Proceeds reduce the pool; balancing charge on any excess	Section 1245 recapture as ordinary income; Form 4797
Reporting	Self-employment pages or partnership return	Form 4562 to Schedule C, or Form 8865 and Schedule K-1

A year-by-year illustration for one asset

Assume a sole trader with a 5 April accounting date buys kitchen equipment for £45,000 on 1 July 2026, when the spot rate is assumed to be $1.30, giving a US basis of $58,500. The equipment is assumed to carry a nine-year ADS recovery period with the half-year convention. The UK claim is the AIA. Figures are illustrative only and the exchange rate is hypothetical.

Year	UK capital allowance	US ADS depreciation	Cumulative US depreciation	Effect on profit
2026 (UK 2026–27)	£45,000 (100%)	$3,250	$3,250	US profit higher by about $55,250
2027	Nil	$6,500	$9,750	UK profit higher by $6,500 equivalent
2028 to 2034 (each year)	Nil	$6,500	$55,250 by 2034	UK profit higher by $6,500 equivalent each year
2035	Nil	$3,250	$58,500	UK profit higher by $3,250 equivalent

The UK return has finished with the asset after one year. The US return is still depreciating it nine years later. Now suppose the equipment is sold in 2030 for £20,000 and the spot rate on the sale date is again $1.30:

• UK: the pool balance attributable to the asset is nil, so, assuming no other balance in the pool, a balancing charge of £20,000 is added to trading profit.
• US: depreciation to the date of sale, including a half-year in 2030, is $26,000, leaving adjusted basis of $32,500. Proceeds of $26,000 produce a loss of $6,500, not a gain.

One sale, taxable income in one country and a deductible loss in the other. A return that carried the UK balancing charge across to Schedule C would overstate US income by more than $32,000 in that year.

What does the mismatch do to the foreign tax credit?

Trading profit of a UK-resident proprietor is taxed first in the United Kingdom, and the US return relieves double taxation by a credit for the UK income tax on Form 1116. The credit is limited to the US tax on the foreign income as the US measures it. A timing difference in the measure of profit therefore becomes a difference in the credit.

• Purchase year. UK profit is reduced by the whole cost, so UK tax is low. US profit is reduced by a small first-year fraction, so US tax on the trade is higher. If the UK tax for the year, together with any credits brought forward, is less than the US tax, a residual US liability arises.
• Later years. The position reverses. UK tax is charged on a profit with no allowance left; US tax is charged on a lower profit. UK tax exceeds the limitation and excess credits accumulate.
• Carryback and carryforward. Unused credits may generally be carried back one year and forward ten within the same category. The excess credits arise after the year in which they were needed, so the one-year carryback reaches the purchase year only for credits generated in the year immediately following it.
• Tax years. The UK tax year and the US calendar year do not coincide, so the UK tax attributable to a US year has to be identified on a consistent paid or accrued basis.

Where the proprietor instead excludes trading income under the foreign earned income exclusion, the profit that is tested and excluded is still the US-computed figure, and deductions allocable to excluded income are restricted. The depreciation schedule has to be right under either approach.

Self-employment income and the partner's Schedule K-1

Net earnings from self-employment

Net earnings from self-employment are computed from the US profit figure, with US depreciation, not from the UK taxable profit. An individual who is subject to UK National Insurance on the trade is ordinarily kept within the UK system alone by the social security agreement between the two countries, evidenced by a certificate of coverage from HMRC, but the net earnings figure is still computed and reported, and it is the figure used wherever the return refers to earned income.

UK partnerships and Form 8865

A UK general partnership or LLP carrying on a trade is ordinarily a foreign partnership for US purposes. A US partner who meets one of the filing categories reports it on Form 8865. Three points follow for plant and equipment:

• Partnership-level computation. The partnership's income is restated under US principles. Capital allowances are reversed and ADS depreciation is substituted, asset by asset, in dollars at historic rates.
• Schedule K-1 (Form 8865). The partner's distributive share of ordinary business income will not equal the profit share on the UK partnership statement. In a year of heavy investment by the firm the US share will be materially higher.
• Source data. A US partner without a controlling interest often receives only the UK tax computation. Preparing the US figures then depends on obtaining the fixed asset additions and disposals from the firm each year, which is better agreed with the partnership in advance than requested at the filing deadline.

How do we prepare and reconcile the two returns?

• Build one fixed asset register with two bases. Each addition is recorded once, with the sterling cost, acquisition date, spot rate, dollar basis, UK pool and US asset class.
• Classify under each system separately. The UK question is which pool and which allowance; the US question is which ADS class life and which convention.
• Apply the de minimis safe harbor consistently, and attach the election statement to each timely original return.
• Track private use on both sides. The UK single asset pool restriction and the US business-use percentage rest on the same mileage or usage records.
• Prepare the UK computation first, because UK tax paid is an input to the US credit.
• Rebuild the US profit from the accounts, not from the UK taxable profit, replacing capital allowances and balancing adjustments with US depreciation and US gain or loss.
• Maintain a standing reconciliation of cumulative UK allowances against cumulative US depreciation, so that the disposal of any asset can be computed correctly on both returns.

This is routine compliance work within our US tax services and UK tax services, and it is most reliable when one team holds both schedules.

What if the UK capital allowance figures were copied onto the US return?

This is the most common error we see on taking over a file. The preparer converts the UK tax-adjusted profit to dollars and enters it on Schedule C, so that the AIA becomes, in substance, a first-year write-off the US rules do not permit. The effects compound:

• US income is understated in purchase years and overstated in later years.
• No Form 4562 was filed, and no dollar basis was ever established.
• UK balancing charges have been reported as US income, when the US computation might show a smaller gain or a loss.
• Foreign tax credit carryovers are wrong in every year affected.

The route to correction depends on the history of the returns.

• One return affected. An incorrect treatment that appeared on a single return is generally corrected by amending that return.
• Two or more consecutive returns. Depreciation computed on an impermissible basis for two or more consecutive years is generally treated as a method of accounting. The correction is then made on Form 3115, with a cumulative adjustment for the difference between depreciation claimed and depreciation allowable. An adjustment that increases income is ordinarily spread over several years.
• Returns never filed. No method has been adopted, so each year is prepared correctly from the acquisition date. For non-wilful cases this is usually done within the IRS streamlined filing compliance procedures, which our IRS streamlined filing team prepares in full, including the delinquent information returns for a UK partnership where they were due.

On the UK side, the equivalent catch-up issue is usually simpler. Expenditure on which no allowance was claimed remains available to enter a pool and attract writing-down allowances in later periods, although the AIA for a closed year is lost unless that year's return can still be amended.

Errors we correct most often

• Section 179 or bonus depreciation claimed on UK equipment because software applied the domestic default.
• The general depreciation system used in place of ADS, with accelerated methods and shorter lives.
• Dollar basis computed at the year-end or average rate instead of the acquisition-date spot rate.
• The UK car's private-use restriction applied on the US return without the listed property records or annual caps.
• Full expensing claimed on the UK return of a sole trader or partnership.
• The AIA claimed by a partnership that has a corporate member.
• The 18% main pool rate applied to a period beginning after 5 April 2026, or no hybrid rate for a straddling period.
• A Schedule K-1 share taken directly from the UK partnership statement.

Speak to us in confidence

If you are a US citizen or green card holder with a UK trade or partnership interest, and your two returns show the same figure for equipment, one of them is very likely wrong. We will rebuild the asset register under both systems, prepare or correct the US and UK returns, and leave you with a single reconciled schedule for future years. Our US UK tax accountants work with business owners and partners whose affairs justify that level of care. Please contact our cross-border team to arrange a confidential consultation.