When purchasing equipment for your business that will be in use for more than one year, you must depreciate the cost a little at a time over several years. Depending on the purchase, it can take years to fully depreciate the cost of business property. Section 179 is a great incentive for businesses to purchase and/or finance equipment and deduct the full amount of the purchase price for the tax year.
What is Section 179?
Section 179 of the tax code is a tax deduction related to the depreciation of qualified business expenses. Section 179 allows business owners to deduct the entire cost of qualifying equipment, property, and software purchased during the tax year. This means that if your business buys or leases qualifying equipment, you are able to deduct the full purchase price from your gross income for that year.
How it Works
Previously, when businesses purchased qualifying equipment, it was typically written off through depreciation over a period of several years. Section 179 allows businesses to write off the entire purchase price, up to $1 million total, for the current tax year. The deductions cannot exceed the taxable income of your business.
Does Your Business Qualify?
Any business that purchases, finances, and/or leases new or used business equipment during the tax year should qualify for the deduction, so long as they’ve spent less than $3.5 million. In order to qualify, the equipment must be used for business purposes more than 50% of the time. The equipment must also be placed into service by midnight, December 31st of the year that you are taking the deduction. Eligible equipment purchases may include:
- Office equipment, i.e. computers, computer software, office furniture, telecommunications equipment
- Machinery purchased for business use
- Improvements to non-residential buildings
- Property contained in a building, i.e. refrigerators, signs
- Business vehicles
The equipment does not need to be new, but it does need to be new to your business. You must maintain complete records of what you have purchased throughout the year. Refer to the IRS and/or your tax accountant for a full list of qualifying equipment, requirements and restrictions.
You may not use Section 179 to deduct the cost of land or inventory, permanent structures attached to land, air conditioning and heating units, property used outside of the United States, or intangible property such as patens, trademarks and copyrights.
Leasing & Section 179
Your business can lease equipment and still take advantage of the Section 179 deduction. The main benefit of leasing is you can still take full advantage of the deduction while making smaller payments. Using a non-tax capital lease, you can purchase and write-off up to the deduction limit worth of equipment for the tax year, without spending that amount during the year. This can help to markedly reduce what you are spending out-of-pocket.
Section 179 vs. Bonus Depreciation
Bonus depreciation also allows businesses to deduct the full cost of equipment purchases. In a lot of cases, bonus depreciation has the same result as taking the Section 179 deduction, however there are scenarios where a business should consider bonus depreciation instead of the Section 179 deduction.
As mentioned previously, Section 179 caps out at $1 million. Businesses that have purchased more than $1 million in equipment should consider bonus depreciation, as it does not cap the maximum amount that can be deducted.
Businesses can also potentially get a larger deduction using bonus depreciation for vehicle purchases. When making large equipment purchases for your business, be sure to consult your tax accountant.
Section 179 has made a tremendous impact for many businesses by giving them the ability to write-off the entire cost of qualifying equipment. Maximize your business’s purchasing power and lower your operating costs by taking advantage of this legal tax incentive.
*This newsletter contains information about tax laws. This information is not advice and should not be treated as such.