If you’re a business owner, you may be familiar with Section 179 of the U.S. tax code. This section allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year, rather than depreciating it over many years. This can be a beneficial tax strategy for businesses looking to reduce their taxable income and save money.
What is the Section 179 Tax Deduction?
The Section 179 tax deduction is a tax code that allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. This deduction can be beneficial for businesses as it can reduce their taxable income, resulting in lower tax bills.
What Qualifying Purchases are Eligible for the Section 179 Deduction?
Most tangible business equipment and off-the-shelf software purchased or financed during the tax year can qualify for the Section 179 deduction. However, there are some specific criteria that must be met:
- The equipment must be purchased, leased, or financed and then placed into service during the tax year.
- The equipment must be used for business purposes more than 50% of the time.
- The deduction can’t exceed the gross income of the business.
- The maximum deduction for 2020 is $1,040,000 and begins to phase out when total qualifying property exceeds $2,590,000
- The total equipment cost must be less than the business’s taxable income.
What Purchases are Not Eligible for the Section 179 Deduction?
There are some purchases that do not qualify for the Section 179 deduction. These include:
- Land or buildings
- Property used outside of the United States
- Property used mainly to furnish lodging or rental property
- Property used mainly for the general public to access amusement parks, swimming pools or athletic facilities
- Property used mainly for investment
How Do You Claim the Section 179 Deduction?
To claim the Section 179 deduction, you need to fill out IRS Form 4562, Depreciation and Amortization. This form must be filed with your business tax return. You can also claim the deduction on your state income tax return if your state allows for it.
Are there any Limitations to the Section 179 Deduction?
Yes, there are limitations to the Section 179 deduction:
- The maximum deduction for 2020 is $1,040,000 and begins to phase out when total qualifying property exceeds $2,590,000
- The deduction cannot exceed the gross income of the business
- The deduction cannot exceed the total cost of the equipment purchased
When Should You Consider Using the Section 179 Deduction?
The Section 179 deduction can be a beneficial tax strategy for businesses looking to reduce their taxable income and save money. Here are some scenarios in which you might want to consider using the Section 179 deduction:
- Your business needs to purchase new equipment or software
- Your business has a profitable year and wants to reduce its taxable income
- Your business has a high tax bill that you would like to reduce
How Does Section 179 Affect Leasing Equipment?
Businesses that lease equipment can also take advantage of the Section 179 deduction. However, the deduction is different for leased equipment than it is for purchased equipment. When leasing equipment, the business can deduct the full cost of the lease payments, up to the maximum deduction limit of $1,040,000.
What is Bonus Depreciation?
Bonus depreciation is another tax code that allows businesses to take a deduction for newly acquired assets. Bonus depreciation allows businesses to deduct 100% of the cost of qualified property in the year it’s acquired. Unlike the Section 179 deduction, there is no limit to the amount of assets that can be deducted using bonus depreciation.
Can You Use Both Section 179 and Bonus Depreciation?
Yes, businesses are allowed to use both Section 179 and bonus depreciation to deduct the full cost of newly acquired property.
What Happens if Purchased Property is Sold or Disposed?
If the purchased property is sold or disposed of before the end of its useful life, the remaining balance of the Section 179 deduction must be added back to the business’s taxable income for that year.
What Happens if the Business Doesn’t Have Taxable Income?
If the business doesn’t have taxable income in the year that the Section 179 deduction is claimed, the deduction can be carried forward to future tax years.
What Happens if Equipment is No Longer Used for Business Purposes?
If the equipment is no longer used for business purposes, then the remaining balance of the Section 179 deduction must be added back to the business’s taxable income for that year.
What are the Benefits of the Section 179 Deduction?
The benefits of the Section 179 deduction include:
- Reducing the amount of taxable income
- Reducing the amount of taxes owed
- Helping businesses with their cash flow by allowing them to deduct the full cost of equipment in the year it’s purchased rather than depreciating it over many years
Conclusion
The Section 179 deduction can be a beneficial tax strategy for businesses looking to reduce their taxable income and save money. By understanding the criteria for eligibility, you can determine if it’s a viable option for your business. Additionally, understanding the limitations of this deduction and other tax codes such as bonus depreciation can help you make informed tax decisions.
FAQs
1. Can vehicles be included in the Section 179 deduction?
Yes, vehicles that are used for business purposes qualify for the Section 179 deduction. However, there are limits to the amount that can be deducted based on the weight and usage of the vehicle.
2. Can the Section 179 deduction be used for used equipment?
Yes, the Section 179 deduction can be used for both new and used equipment as long as it meets the eligibility criteria.
3. What is the difference between Section 179 and depreciation?
Depreciation is a method of spreading the cost of an asset over its useful life, while the Section 179 deduction allows businesses to deduct the full cost of the asset in the year it’s purchased.
4. Can the Section 179 deduction be carried forward to future years?
Yes, any unused portion of the Section 179 deduction can be carried forward to future tax years.
5. Can the Section 179 deduction be used for rental property?
No, the Section 179 deduction cannot be used for property used mainly to furnish lodging or rental property.
