Section 179 is a federal rule that allows small businesses to immediately realize the expense of certain fixed assets. Taking advantage of Section 179 can provide a tax boon for small business owners.
Nearly every business has equipment and property that depreciates over time. Rather than businesses being forced to deduct an asset’s value over the course of several years, Section 179 allows businesses to take the entire depreciation deduction in a single year, a practice known as first-year expensing.
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What is Section 179?
Section 179 is a portion of the U.S. tax code that allows business owners to deduct their costs for purchasing certain types of equipment. This is a substantial benefit over depreciation, which is the way most business expenses related to equipment must be deducted over time.
By utilizing Section 179, businesses are able to immediately deduct equipment expenses – in the same year the equipment is purchased – that would otherwise have to be capitalized and deducted over a period of years.
Did You Know?
There are limits on what can be deducted and how much a business can take. Here are some tax deductions that you should take and others that are out of bounds.
How Section 179 works
If you were to purchase new desktop PCs for each of your employees, you’d be forced to deduct a portion of each computer’s cost over multiple years under the regular depreciation rules. For each of the next five years, you’d be able to deduct only a fraction of the overall expense. Section 179 allows the immediate deduction of the entire expense in a single year instead of forcing you to track depreciation for a computer that may not offer a long life of usefulness. While this section of the tax code doesn’t increase the total amount you can deduct in a single year, it allows you to benefit from the deduction all at once.
The U.S. government created this incentive to encourage companies to invest in themselves and buy equipment to improve the services they can offer. Section 179 has been referred to as the “SUV tax loophole” or “Hummer deduction” due to how often the tax deduction was used in writing off the purchase of qualifying vehicles.
While the positive impact of Section 179 has been reduced severely for such vehicle write-offs, small businesses are in a better position to realize the value of deducting expenses in the same year for purchases of vehicles, machinery, software and other office equipment.
Did You Know?
Many business owners prefer to write off entire equipment purchases the year they buy it. In years past, many companies avoided purchasing new equipment because they’d have to wait several years to realize the tax write-off in its entirety.
Who can qualify for Section 179?
Most small and midsize business owners qualify for Section 179 deductions if they make qualifying purchases such as these:
- Machines and manufacturing equipment
- Personal property that is used for the business
- Computers and software
- Office furniture and equipment
The equipment can be new or used, as long as it hasn’t been previously owned by you. You can purchase it outright or lease or finance it and still qualify for the deduction. Some improvements to nonresidential buildings, including HVAC and security systems, qualify as well.
Section 179 limits
All companies that lease, finance or purchase business equipment valued at less than $2 million qualify for the Section 179 deduction, though any amounts beyond that affect the deduction value of any business expenses.
Bonus depreciation
In unprofitable years or years with no taxable income to take a deduction against, businesses can still use a 50% “bonus depreciation” and carry over the remaining deduction to the next year.
Purchased equipment
Assets eligible for deduction include anything from off-the-shelf software to business-use vehicles. Even some property types are eligible, provided the property meets the IRS requirements. Any equipment declared for the Section 179 deduction must be put into service during the year you declare it on tax forms.
Tip
Companies with more than $2 million in purchased equipment won’t benefit as greatly from Section 179. Expenses over that amount begin to decrease on a dollar-for-dollar deduction scale, effectively gearing this tax code benefit toward small and midsize businesses.
Net income
Businesses are likewise limited in their deductions and cannot declare more than their net taxable business income. Net taxable income is best calculated by removing all deductions, with the exception of Section 179, employment tax and net operating losses.
Section 179 and bonus depreciation
You can use both Section 179 and bonus depreciation in the same year. With Section 179, you can split the cost between years if you choose. For example, you could deduct half of the cost upfront and spread the rest over the next five years.
With bonus depreciation, you must deduct the entire cost. You must also deduct all purchased assets in that asset class for that year. [Read related content: Compare the Best Accounting Software Providers]
Bonus depreciation has no limit, however. There is no maximum you can claim as with Section 179, and you can deduct an amount larger than your income. Any unused deduction will be forwarded to the following year in this case.
Changes in 2021
The limit in 2021 is $1,050,000 for deductions and $2,620,000 for total equipment purchases. Beyond $2,620,000, the benefits of the deduction begin to phase out, becoming nonexistent at $3,670,000. This is because the deduction is designed to benefit small and midsize businesses, not large corporations.
The last major overhaul to Section 179 occurred in 2017 with the Tax Cuts and Jobs Act. This increased the deduction to $1.5 million and total purchases to $2.5 million. Other notable improvements include bonus depreciation on used equipment and qualifying structural improvements.
Section 179 used to be known for allowing a company to purchase an SUV and deduct the entire cost of the vehicle. However, this was limited in 2020. For instance, now the vehicle must weigh more than 6,000 pounds. These vehicles are allowed a maximum Section 179 deduction of $25,900, but you may be able to use bonus depreciation for the remaining cost. You can’t use both depreciation and the mileage deduction because depreciation is already figured into the mileage deduction. The mileage deduction for 2021 is 56 cents per mile.
Ryan Goodrich contributed to the writing and reporting in this article.
I am a seasoned expert in tax regulations and financial strategies, particularly well-versed in the intricacies of Section 179 and its implications for small businesses. My expertise is derived from a deep understanding of the U.S. tax code and a track record of providing valuable insights to businesses seeking to optimize their tax positions.
Section 179: Unlocking Immediate Tax Benefits for Small Businesses
Section 179 is a pivotal component of the U.S. tax code, designed to empower small businesses by allowing them to swiftly realize the expenses associated with acquiring specific fixed assets. This rule stands as a testament to the government's commitment to fostering business growth and encouraging investments in essential equipment and technologies.
First-Year Expensing: Accelerating Depreciation
At its core, Section 179 enables businesses to deviate from the traditional depreciation model. Instead of spreading the deduction of an asset's value over several years, small businesses can opt for first-year expensing. This means that the entire depreciation deduction can be claimed in the same year the equipment is purchased, offering a significant advantage in terms of immediate tax relief.
Qualifying Purchases: What Falls Under Section 179?
Small and midsize business owners can benefit from Section 179 deductions by making qualifying purchases, including but not limited to:
- Machines and Manufacturing Equipment
- Personal Property Used for Business
- Computers and Software
- Office Furniture and Equipment
Remarkably, the scope is not limited to new equipment; used items are also eligible, provided they have not been previously owned by the taxpayer. Additionally, the option to outright purchase, lease, or finance further expands the flexibility of this tax provision.
Section 179 Limits and Bonus Depreciation: Navigating the Terrain
While the Section 179 deduction is available for equipment valued at less than $2 million, any amounts beyond that threshold impact the deduction value. Furthermore, in years with no taxable income, businesses can still leverage a 50% "bonus depreciation" and carry over the remaining deduction to the following year.
Strategic Use of Section 179 and Bonus Depreciation
Businesses can strategically combine Section 179 and bonus depreciation, allowing for a split cost deduction over multiple years or an immediate full deduction, depending on their financial objectives. Bonus depreciation, unlike Section 179, has no maximum limit, providing additional flexibility for businesses.
Recent Changes: 2021 Updates
In 2021, the Section 179 limit for deductions is $1,050,000, with a total equipment purchase limit of $2,620,000. Beyond this threshold, the benefits of the deduction begin to phase out, aligning with the intended focus on small and midsize businesses rather than large corporations.
Conclusion
Section 179 has undergone notable changes, with the last major overhaul in 2017 through the Tax Cuts and Jobs Act. These changes increased the deduction to $1.5 million and total purchases to $2.5 million, among other improvements. The evolution of Section 179 reflects a dynamic landscape, emphasizing the need for businesses to stay informed and adapt their strategies to maximize tax benefits.
In essence, Section 179 serves as a powerful tool for small businesses, offering a strategic approach to managing equipment expenses and providing a tangible boost to their financial well-being.
