Learn how to take advantage of a 179 deduction when you need to purchase certain tangible assets to grow your company so you can potentially reduce your tax bill.
What Is Section 179?
Section 179 is a tax deduction that allows businesses to write off all or part of the cost of qualified property and equipment, up to a limit, during the first year it was purchased and placed into service. Section 179 was designed to help small businesses invest in themselves, and in turn the American economy. The significant tax savings afforded by this deduction can often be a deciding factor for businesses that are debating whether or not to invest in eligible property that might help them grow. Companies can deduct up to about $1.08 million of the total cost of eligible property, including new and used qualified depreciable assets, as of the 2022 tax year. Additionally, there are caps to how much a company can spend on property as a whole in one calendar year. If a business spends more than $2.7 million on property, the Section 179 deduction will be reduced by the overage amount. These limits are adjusted for inflation each year. For tax year 2023, companies can deduct no more than $1.16 million in the total cost of eligible property, and will be reduced by any amount more than $2.89 million.
What Qualifies for Section 179 Deduction?
A property must meet the requirements established by the IRS in order to be eligible for a Section 179 deduction.
50% Business Use
Any piece of property claimed as Section 179 must be used for business purposes at least 50% of the time during the first year it was put into service. In the case of a car, for instance, if you use the car for both business and personal use, it must be employed for your business at least 50% of the time.
Tangible Personal Property
Many types of property purchased for a business can qualify for Section 179 as long as it counts as tangible personal property. Land and land improvements do not qualify, nor does intellectual property. Examples of eligible property include:
Machinery and equipmentOffice equipment and furnitureComputers and “off-the-shelf” softwareProperty attached to a building that is not a structural component, such as refrigerators, signs, and air conditioners or heatersVehicles (with some restrictions—see below)Eligible improvements to non-residential buildings like roofs, security systems, and HVAC
Acquired by Purchase
In order to claim Section 179, the property must have been acquired by a company via an exchange of money. Inherited property and gifts do not qualify for Section 179. Additionally, you cannot claim Section 179 if you purchased the property from a direct relative such as a spouse or sibling.
“Placed into Service”
Primarily, the point of Section 179 is to deduct the cost of equipment the same year it was placed into service. The IRS defines “placed into service” as the moment when a piece of property is ready and available for a specific use. That means that any equipment purchased during a calendar year, but not put in service before midnight on Dec. 31 no longer is eligible for Section 179.
Which Vehicles Are Eligible for Section 179
While vehicles are a common business expense, Section 179 used to be considered a loophole when purchasing certain SUVs. Lawmakers have since created stricter regulations for how business vehicles can be expensed using Section 179. Any four-wheeled vehicle designed to carry passengers, including cars, trucks, vans, and SUVs weighing between 6,000 and 14,000 pounds can qualify for at least a portion of Section 179. For tax year 2023, the maximum Section 179 deduction was $28,900 if the vehicle was used for business purposes. The limits on deductions do not apply to all vehicles, specifically those designated as work vehicles without personal use, such as an ambulance, a hearse, a vehicle with a cargo area measuring at least six feet, or a truck or van designed to carry more than nine passengers.
How To Claim Section 179 Deductions
Claiming Section 179 for eligible property is relatively straightforward, as long as you’ve maintained proper records for all purchases made during a tax year.
Calculating Your Section 179 Deduction
Before you file your taxes, you may want to take time to understand how much you may be eligible for in Section 179 deductions. There are many free Section 179 calculators available online, or you can work with your tax preparer to understand how much you can save by claiming eligible property.
Taxable Income
Once you’re ready to file your taxes, the first step is to understand your business’s taxable income. Doing so will help you understand the upper limits of what you are eligible to claim as Section 179. Taxable income is defined as totalling the net income and losses from all trades and businesses you actively conducted during the year.
Form 4562
In order to write off eligible property in the first year it was purchased, you must include Form 4562 with your taxes and elect the Section 179 deduction. You’ll need to list the property you’re claiming as the Section 179 deduction, the price, and the amount you’re deducting. You can attach pages to the form if your list exceeds what’s available on line 6. You’ll also want to include any Section 179 you’re planning to carry forward from previous years, as long as your taxable income supports it.
The Bottom Line
Claiming a Section 179 deduction can be a major help when it comes to your small business taxes. Machinery and equipment can be expensive for small companies, so business owners can factor in this tax advantage when making purchasing decisions. Ultimately, however, these deductions can be nuanced and complicated, so it’s always a good idea to check in with your accountant or tax preparer before making a major purchase, and again when it comes time to claim the Section 179 deduction.
