What is the Section 179
Deduction
Most people think the
Section 179 deduction is some mysterious or complicated tax code. It really
isn't, as you will see below.
Essentially, Section 179
of the IRS tax code allows businesses to deduct the full purchase price of
qualifying equipment and/or software purchased or financed during the tax year.
That means that if you buy (or lease) a piece of qualifying equipment, you can
deduct the FULL PURCHASE PRICE from your gross income. It's an incentive
created by the U.S. government to encourage businesses to buy equipment and
invest in themselves.
Several years ago, Section 179 was often referred to as the "SUV
Tax Loophole" or the "Hummer Deduction" because many businesses have used this
tax code to write-off the purchase of qualifying vehicles at the time (like
SUV's and Hummers). But that particular benefit of Section 179 has been
severely reduced in recent years (see 'Vehicles & Section 179' for current limits on business vehicles.)
However, despite the SUV
deduction lessened, Section 179 is more beneficial to small businesses than
ever. Today, Section 179 is one of the few government incentives available to
small businesses, and has been included in many of the recent Stimulus Acts and
Congressional Tax Bills. Although large businesses also benefit from Section
179 or Bonus Depreciation, the original target of this legislation was much
needed tax relief for small businesses - and millions of small businesses are
actually taking action and getting real benefits.
Here's How Section 179
works:
In years past, when your business bought qualifying equipment, it
typically wrote it off a little at a time through depreciation. In other words,
if your company spends $50,000 on a machine, it gets to write off (say) $10,000
a year for five years (these numbers are only meant to give you an example).
Now, while it's true that this is better than no write-off at all,
most business owners would really prefer to write off the entire equipment
purchase price for the year they buy it.
And that's exactly what
Section 179 does - it allows your business to write off the entire purchase
price of qualifying equipment for the current tax year.
This has made a big
difference for many companies (and the economy in general.) Businesses have
used Section 179 to purchase needed equipment right now, instead of waiting.
For most small businesses, the entire cost of qualifying equipment can be
written-off on the 2018 tax return (up to $1,000,000).
Limits of Section 179
Section 179 does come
with limits - there are caps to the total amount written off ($1,000,000 for
2018), and limits to the total amount of the equipment purchased ($2,500,000 in
2018). The deduction begins to phase out on a dollar-for-dollar basis after
$2,500,000 is spent by a given business (thus, the entire deduction goes away
once $3,500,000 in purchases is reached), so this makes it a true small and
medium-sized business deduction.
Who Qualifies for
Section 179?
All businesses that
purchase, finance, and/or lease new or used business equipment during tax year
2018 should qualify for the Section 179 Deduction (assuming they spend less
than $3,500,000).
Most tangible goods used by American businesses, including "off-the-shelf" software and business-use vehicles (restrictions apply) qualify for the
Section 179 Deduction.
For basic guidelines on what property is covered under the Section
179 tax code, please refer to this list of qualifying equipment.
Also, to qualify for the Section 179 Deduction, the equipment and/or software
purchased or financed must be placed into service between January 1, 2018
and December 31, 2018.
What's the difference
between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn't.
Right now in 2018, it's being offered at 100%.
The most important difference is both new and used equipment qualify
for the Section 179 Deduction (as long as the used equipment is "new to you"),
while Bonus Depreciation has only covered new equipment only until the most
recent tax law passed. In a switch from recent years, the bonus depreciation
now includes used equipment.
Bonus Depreciation is useful to very large businesses spending
more than the Section 179 Spending Cap (currently $2,500,000) on new capital
equipment. Also, businesses with a net loss are still qualified to deduct some
of the cost of new equipment and carry-forward the loss.
When applying these
provisions, Section 179 is generally taken first, followed by Bonus
Depreciation - unless the business had no taxable profit, because the
unprofitable business is allowed to carry the loss forward to future years.
Section 179's "More Than
50 Percent Business-Use" Requirement
The equipment,
vehicle(s), and/or software must be used for business purposes more than 50% of
the time to qualify for the Section 179 Deduction. Simply multiply the cost of
the equipment, vehicle(s), and/or software by the percentage of business-use to
arrive at the monetary amount eligible for Section 179.