If you’re a business owner, you’ve probably heard of a tax deduction. What you might not have heard of is the Section 179 Tax Deduction. Section 179 of the Internal Revenue Service’s tax code is a tax break created to stimulate the economy by allowing businesses to deduct the full cost of a qualified piece of equipment. This is instead of traditional depreciation, where businesses had to deduct the price over time. It’s a great way for businesses, especially small or new businesses, to save valuable capital. Let’s get in to it in further detail.
What is Section 179?
Section 179 of the IRS tax code is a tax deduction that allows taxpaying businesses to deduct the cost of equipment (like office furniture and automobiles) that is used for trade or business matters. During the tax year, business owners can deduct the full price of equipment and property that they purchase. Additionally, Section 179 is not limited to purchases, as businesses can also deduct equipment that they finance. This is a tax deduction that is particularly helpful for small and new businesses that may be tight on capital.
How does Section 179 work?
Section 179 of the IRS tax code allows businesses an expense deduction on equipment it purchases or finances for business purposes. To qualify for the deduction, the equipment must fit the stipulations outlined in Section 179, which we’ll discuss later. This tax deduction is especially helpful for small businesses that might be running low on valuable capital. Additionally, Section 179 allows businesses to take deductions on qualified assets within the same year that the asset is put to use.
Any business that finances or purchases equipment (new or used) during the tax year will likely qualify. So, if your business fits these parameters, and doesn’t break any of the limitations mentioned in this or any other sections, then you are free to utilize the benefits of Section 179.
Why should businesses use Section 179?
There are various reasons why businesses take advantage of the benefits of Section 179. Businesses utilize legal tax deductions and incentives to mitigate operating costs and save capital. Section 179 is a straightforward tax deduction that incentivizes businesses to purchase or finance equipment. This allows businesses to invest in themselves and become more productive more easily. Besides the benefit to businesses, Section 179 also has the intention of stimulating the economy.
Overall, using Section 179 will allow your business to get the equipment you need while saving useful capital.
Qualifications and Examples of Equipment Covered Under Section 179
Nearly all types of business equipment are covered under Section 179, whether they are purchased, financed or leased. These include but are not limited to:
- Computer hardware
- Off-the-shelf software (non-modified software)
- Business vehicles with a gross vehicle weight between 6,000 and 14,000 lbs
- Office furniture and supplies
- Renovations or additions made to non-residential buildings
- Equipment used for business reasons at least 50% of the time
There have been some updates with Section 179 over the years since it was put in to effect. The 2017 Tax Cuts and Jobs Act granted expanded benefits to Section 179. Since then, businesses have utilized this expansion of equipment and property benefits, as well as the several additions that have come since.
Starting January 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital property. This extends up to $2.5 million. Also, businesses can now use Section 179 for building renovations and additions; however, the improvements must be started after the building is already in use.
This addition includes:
• Elevators or escalators
• Internal structural changes
• Building enlargement
Limitations of Section 179
Section 179 comes with some restrictions. As of 2019, the maximum amount a business can deduct on a piece of equipment is $1 million. Also, businesses can spend a maximum of $2.5 million on equipment before they no longer qualify for a Section 179 deduction. Past this amount, the tax deduction tapers down. Another stipulation is that the material must be used for business or industry purposes. As we’ve mentioned previously, the piece of equipment must be put in to service the same year you claim a Section 179 deduction. Putting an asset into service means that it must be set up, working and in use.
Section 179 and Vehicles
Vehicles are integral to the operations and success of most businesses. So, it’s no surprise that a common piece of equipment that businesses deduct through Section 179 is a vehicle. While business’s options for vehicles are quite expansive, there are some qualifications that they must meet.
Vehicles that people use strictly for work purposes qualify for Section 179 deduction. These include the following vehicles:
- Vehicles that can seat nine or more passengers behind the driver’s seat (i.e., transport vans, etc.) or vehicles with no rear seats and an enclosed storage area (i.e., cargo vans).
- Heavy construction and warehouse vehicles
In many cases, vehicles can serve both business and personal functions. Due to this, the stipulations for business vehicle deductions are usually updated each year and can be complicated. If you would like to look in to the information further, you can visit the IRS business page.
There are Section 179 deduction limits for vehicles. With Bonus Depreciation factored in, the deduction limits are $11,160 for cars and $11,560 for trucks and vans. There are exceptions it these limitations, which we’ll list below:
- Ambulances or hearses
- Heavy, non-SUV vehicles and trucks with a cargo area at least six feet in interior length (i.e., a pickup truck with a sufficiently large storage bed)
- Any form of vehicle used for transporting people or property
- Qualified non-personal use vehicles specially modified for business (i.e., a work van)
Certain vehicles with a gross vehicle weight rating between 6,000 lbs. and 14,000 lbs. qualify for a maximum deduction of $25,000, as long as the vehicle is purchased and put to use the same year as the deduction request (before Dec. 31).
As we mentioned in a previous section, vehicles should be used for business at least 50 percent of the time to qualify for the Section 179 deduction. Also, whether the vehicle itself is new or used, it must be new to the business to qualify.
Section 179 and Bonus Depreciation
People sometimes confuse or conflate the ideas of bonus depreciation and Section 179 with one another. While they are somewhat similar, they differ in several distinct ways. First, Section 179 allows a business to expense a cost and bonus depreciation facilitates the recovery of that cost over a period. The second distinguishing difference between the two is that the businesses that surpass the spending limit of Section 179 are still eligible for bonus depreciation benefits. Lastly, the Section 179 deduction is limited to $1 million, while bonus depreciation has no annual limit.
If you choose not to go with the Section 179 deduction and skip bonus depreciation, you can also use regular depreciation to deduct the cost of business equipment over time.
An additional benefit of Section 179 is that it isn’t limited to the purchase of equipment; it can also be utilized with equipment financing and leasing. Using Section 179 while financing your business’s equipment is an excellent way to get the equipment you need fast when you don’t have the funding necessary to spend on an outright purchase while saving you valuable capital. Your tax savings could be reallocated to other business expenses or even the equipment financing payments themselves.
Are you thinking about getting an equipment loan or lease? Crestmont Capital can help get you set up, so you can start saving with a Section 179 deduction.
Property That Does Not Qualify for Section 179
We’ve discussed what equipment qualifies for Section 179, but now let’s cover some that do not.
- The first item that does not qualify for the Section 179 Tax Deduction is real property. Real property refers to land, buildings, parking lots and other permanent structures.
- The second type of property is anything received as a gift or inheritance
- The third is property physically outside the boundaries of the United States
How to Apply
So, now that you’ve read about the benefits and inner workings of Section 179, you might be curious as to how one applies for it. Fortunately, applying for a Section 179 tax deduction is simple. All you do is fill out IRS Form 4562 when it comes time to do your taxes. This form collects information on the business property your business purchased (or financed) and started using. For more details on completing Form 4562, you can view the instruction form here. Many business owners prefer to have a tax expert with them when they’re filling out their tax forms, as the specialists can prevent mistakes and potentially spot additional tax deductions.
It’s important to note that the registration period for Section 179 always expires at the end of every year, so if you’re thinking about registering a piece of property, it’s essential to do so as soon as possible.
The Bottom Line
The Section 179 deduction is a part of the tax code that can help your business in many ways. It can also stimulate the economy, as businesses continue to re-invest in themselves and subsequently thrive. Fortunately, Section 179 is relatively simple to apply for and covers most equipment intended for business purposes.
Whether you’re thinking of purchasing or financing, Crestmont Capital can provide you with more information and answer any questions you may have. Feel free to contact us today!
Information dispensed on this site is for informational purposes only and accuracy is not guaranteed. Crestmontcapital.com and its owners, affiliates, suppliers, and partners are not tax advisors, and this site is not intended to offer any tax advice. You should consult your own tax, legal and accounting advisors concerning your specific situation.