- Section 179 allows businesses to use entire depreciation deductions the year the purchase is made.
- Section 179 is designed to aid small and midsize businesses.
- Bonus depreciation can be used along with Section 179 to maximize deductions.
Section 179 is a federal rule that allows small businesses to immediately recognize the expense of certain fixed assets. Taking advantage of Section 179 can provide a great tax boon for small business owners.
Nearly every business has equipment and property that depreciates with time. Rather than businesses 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 under the regular depreciation rules. For the next five years, you'd only be able to deduct fractions of the overall expense. Section 179 allows the immediate deduction of the entire expense in a single year instead of forcing you to track depreciation for a computer that doesn't typically offer a long lifetime of usefulness. 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.
Who can qualify for Section 179?
Most small and midsize business owners qualify for Section 179 deductions if they make qualifying purchases such as these:
- Machines and manufacturing equipment
- Personal property that is used for the business
- Computers and software
- Office furniture and equipment
The equipment can be new or used, as long as it hasn't been previously owned by you. You can purchase it outright, or lease or finance it and still qualify for the deduction. Some improvements to nonresidential buildings, including HVAC and security systems, qualify as well.
Section 179 limits
All companies that lease, finance or purchase business equipment valued at less than $2 million qualify for the Section 179 deduction, though any amounts beyond that 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% "bonus depreciation" and carry over 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 the IRS requirements. Any equipment declared for the Section 179 deduction must be put into service during the year you declare it on tax forms.
Companies with more than $2 million in purchased equipment won't benefit as greatly from Section 179. Expenses over that amount begin to decrease on a dollar-for-dollar deduction scale, effectively gearing this tax code toward small and midsize 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.
Section 179 and bonus depreciation
You can use both Section 179 and bonus depreciation in the same year. WIth 179, you can split the cost between years if you choose. For example, you could deduct half of the cost upfront and spread the rest over the next five years.
With bonus depreciation, you must deduct the entire cost. You must also deduct all purchased assets in that asset class for that year.
Bonus depreciation has no limit, however. There is no maximum you can claim as with Section 179, and you can deduct an amount larger than your income. Any unused deduction will be forwarded to the following year in this case.
Changes in 2020
The limit in 2020 is $1,040,000 for deductions and $2,590,000 for total equipment purchases. After $2,590,000, the benefits of the deduction begin to phase out, becoming nonexistent at $3,630,000. This is because the deduction is designed to benefit small and midsize businesses instead of large corporations.
The last major changes to Section 179 occured in 2017 with H.R.1, better known as the Tax Cuts and Jobs Act. This increased the deduction to $1 million and total purchases to $2,500,000. Other notable improvements include bonus depreciation on used equipment and qualifying structural improvements.
The SUV deduction
Section 179 was famous at one time for allowing companies to purchase SUVs and deduct the entire cost of the vehicle. There are some limits to this in 2020. For instance, the vehicle must weigh more than 6,000 pounds. These vehicles are allowed a maximum 179 deduction of $25,900, but you may be able to use bonus depreciation for the remaining cost. You can't use both depreciation and the mileage deduction, because depreciation is already figured into the mileage deduction. The mileage deduction for 2020 is 57.5 cents per mile.