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Section 179 Deduction: Rules & Limits

Calculator, section 179
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Section 179 is a federal rule that allows small businesses to recognize immediately the expense of certain fixed assets. Taking advantage of Section is very important because it can provide a great tax boon for small business owners.

Nearly every business has equipment and property that depreciates with time. Rather than being forced to deduct an asset’s value over the course of several years, Section 179 allows businesses to get the entire depreciation deduction in a single year, a practice known as first-year expensing.

How Section 179 works

If you were to purchase all-new desktop PCs for every employee, you’d be forced to deduct a portion of each computer’s cost over multiple years according to the regular depreciation rules. For the next five years, you’d only be able to deduct fractions of the overall expense. Section 179 allows for the immediate deduction of the entire expense in a single year instead of being forced to track depreciation for a computer that doesn’t typically offer a long useful lifetime. While this section of the tax code doesn’t increase the total amount you can deduct in a single year, it allows you to benefit from the deduction all at once.

The U.S. government created this incentive to ultimately encourage companies to invest in themselves and buy equipment to improve the services they can offer. In previous years, Section 179 was often referred to as the “SUV Tax Loophole” or “Hummer Deduction” due to how often the tax deduction was used in writing off the purchase of qualifying vehicles.

While the positive impact of Section 179 has been reduced severely for such vehicle write-offs, small businesses are in a better position to realize the value of deducting expenses in the same year for purchases of vehicles, machinery, software and other office equipment. Many business owners prefer to write off entire equipment purchases the year they buy it. In years past, many companies avoided purchasing new equipment because they’d have to wait several years to realize the tax write-off in its entirety.

Section 179 limits

All new and used equipment is eligible for deduction up to $500,000 for 2013. All companies that lease, finance or purchase business equipment valued at less than $2 million still qualify for the Section 179 deduction, though any amounts beyond that limit affect the deduction value of any expenses. In unprofitable years or years with no taxable income to use for a deduction, businesses can still use a 50 percent “Bonus Depreciation” and carry forward the remaining deduction to the next year.

Assets eligible for deduction include anything from off-the-shelf software to business-use vehicles. Even some property types are eligible, provided the property meets a specific set of requirements set by the IRS. Any equipment declared for the Section 179 deduction must be put into service during the year it is declared on tax forms.

Companies with more than $2 million in purchased equipment won’t benefit as greatly from Section 179. Expenses over that maximum amount begin to decrease on a dollar-for-dollar deduction scale, effectively gearing this tax code toward small and medium-sized businesses.

Businesses are likewise limited in their deductions and cannot declare more than their net taxable business income. Net taxable income is best calculated by removing all deductions with the exception of Section 179, employment tax and net operating losses.

Changes in 2014

Every year, the IRS alters the benefits associated with Section 179. For example, the deduction limit, which was $500,000 in 2013, will be reduced to $25,000 in 2014. Also, the equipment purchase limit of $2 million will be cut to $200,000 after 2013. 

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