As a business owner, when purchasing property, such a vehicle or machinery, you are eligible for tax deductions for buying and using them. These deductions resemble the basic principle of depreciation. In other words, you can write off the expense of buying certain types of property over a certain number of years. However, a Section 179 deduction improves upon this standard by allowing you to write it off in a single year. This is important for business owners like you because it can save you money on your business tax return.
What is a Section 179 deduction?
Section 179 of the IRS Code helps businesses by allowing them to take a depreciation deduction for certain assets in a single year, rather than depreciating them over a longer period of time. There is a large benefit to taking the full tax deduction for the cost of the property upon purchase, rather than being required to spread out the deduction over the item’s useful life.
For example, if you buy machinery or other office equipment, you can deduct the full cost of that machinery in one year with Section 179.
How Does Section 179 work?
In the past, as a business purchased qualifying equipment, it typically wrote the equipment off little by little through depreciation. For example, if your company spends $50,000 on a machine, it may write off $10,000 per year for five years.
In 2019, however, most business owners prefer to write off the entire equipment purchase price for the year it is bought. A Section 179 deduction does exactly that. 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 overall.
Businesses have used Section 179 to purchase necessary equipment when they need it, instead of waiting for when it made fiscal sense. For most small businesses, the entire cost of qualifying equipment can be written-off on the 2019 tax return. Specifically, qualifying equipment up to $1,000,000 can be written off.
Pro tip: You may be able to take bigger deductions in the year when you first buy and begin using this property.
Section 179 Deduction Depreciation Example
Equipment Purchases: $1,150,000.00
First Year Write Off: $1,000,000.00
100% Bonus First-Year Depreciation: $ 150,000.00
Normal First Year Depreciation $ 0.00
Total First Year Deduction: $1,150,000.00
($1,000,000 + $150,000 +0)
Cash Savings: $402,500.00
($1,150,000 x 35% tax rate)
Equipment Cost after Tax: $747,500.00
(assuming a 35% tax bracket)
Recent Updates to Section 179 Deductions
The benefit of Section 179 increased recently due to the Trump Tax Cuts of 2017. Otherwise known as Tax Cuts and Jobs Act of 2017, this change guarantees that business owners will see these benefits for the next few years.
Effective for tax years beginning January 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital property, with a limit of $2.5 million. After 2018, the limits are indexed to inflation. In addition, businesses can also take this deduction for nonresidential property improvements after the building is in use by your business. This includes improvements to a building’s interior in the following ways:
- Enlargement of the building
- The internal structure of the building
- Elevators or escalators
If any of the above were a part of the original construction, they may be deductible expenses under a different category.
What types of property qualify for a Section 179 Deduction?
The IRS has two general requirements for qualified property.
1. The property must be “tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.” Vehicles, as well as land and buildings, are included.
2. The property must be purchased and put into service in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it for your business.
Business property purchases that may qualify for Section 179 deductions include:
- Machinery and equipment.
- Vehicles with gross vehicle weight over 6,000 lbs.
- Business personal property, which is any type of property that isn’t attached physically to a building. This includes everything from office equipment and furniture, free-standing shelves, computers, etc.
- Listed property that can be used for both business and personal purposes. The Section 179 deduction is based only on the percentage of time you use this property for business purposes.
- Improvement costs to business buildings for fire suppression, alarms and security systems, HVAC, and roofing.
This is a high-level list of potential business properties that may qualify. For more specific guidance pertaining to what you own, you should speak to your tax professional.
How to Take Advantage of a Section 179 Deduction
To take a Section 179 deduction, you should speak to your tax professional. You can start this process by purchasing whatever qualifying property your business needs. Begin to use this property. Make sure to save your receipts because records of the purchase and use will be necessary to file. Associated costs, such as freight and setup, should also be taken into account. Make sure to read all of the relevant IRS information carefully. You will fill out IRS Form 4562 to complete a Section 179 deduction. Remember that your Section 179 deduction cannot exceed $2.5 million.