Tax deductions are a crucial factor for businesses in managing their finances and maintaining profitability. One significant tax deduction that small-to-medium-sized businesses have at their disposal is the Section 179 tax deduction.
What is the Section 179 Tax Deduction?
The Section 179 tax deduction is a provision in the IRS code that allows businesses to deduct the full purchase price of qualifying equipment and software purchased or leased in a given tax year. The deduction is also available for financed equipment.
For instance, if you buy or lease $50,000 worth of equipment in a given year and you qualify for the Section 179 tax deduction, you can deduct that full $50,000 from your taxes for the year.
What Qualifies for the Section 179 Deduction?
Not all equipment or software purchases can be considered for the Section 179 deduction. The qualifying equipment is anything tangible and used for business purposes. This can include:
- Machinery and equipment
- Office furniture
- Computer software
- Office equipment and technology
- Business vehicles
It is worth noting, however, that certain items such as land and buildings do not qualify for the Section 179 tax deduction.
What are the Limits on Section 179 Deduction?
Although there is no cap on the total amount of the Section 179 deduction that a business can take advantage of, there are limits that apply to the deduction. The IRS sets limits on the maximum deduction for the tax year as well as the total amount of equipment purchases that can be considered for the deduction.
For example, the maximum deduction amount for equipment purchases made in 2021 is $1,050,000. The total limit on equipment purchases that can be considered for the Section 179 deduction is $2,620,000. If your equipment purchases were less than $2,620,000, then you can write off the full $1,050,000.
What are the Benefits of Section 179 Deduction?
The Section 179 tax deduction offers several benefits for small and medium-sized businesses. Here are a few:
- Tax Savings: Businesses can get immediate tax savings by deducting the cost of qualifying equipment or software from their taxes in the same year of purchase.
- Cash Flow: The immediate tax savings from the deduction help businesses maintain their cash flow and liquidity to invest in other areas of their operations.
- Incentive for Growth: The Section 179 deduction provides an incentive for businesses to invest in their growth by purchasing or leasing new equipment or software, which can help them expand their operations and increase revenue.
What are the Eligibility Requirements for Section 179 Deduction?
The eligibility requirements for the Section 179 deduction are:
- The equipment or software must be purchased or leased and put into service the same tax year in which the tax deduction is being taken.
- The equipment or software must be used over 50% for business activity during the year of purchase.
- The equipment or software must be new or used and have not been previously used by the taxpayer.
Are There Any Disadvantages of Section 179 Deduction?
While the Section 179 tax deduction offers several benefits, there are also potential disadvantages that businesses should consider before making their purchase decisions.
- Final Value of Equipment: The actual value of the equipment may be less than the deduction amount. For instance, if a $100,000 equipment is eligible for a $50,000 Section 179 tax deduction, the actual value of the equipment is $50,000 after the deduction.
- Equipment Maintenance and Warranty Costs May Not Be Deductible: These costs may not be deductible under Section 179.
- Business Profitability: The Section 179 tax deduction can only be used to offset taxable income, hence, a loss-making business cannot benefit from the deduction.
How to Claim Section 179 Tax Deduction?
Businesses can claim the Section 179 deduction by filing IRS Form 4562, which is also known as the Depreciation and Amortization Form. The form should be filed together with the business tax return for the year in which the equipment or software was purchased or leased.
If you plan on taking the Section 179 deduction, it’s important to consult with your tax professional to determine whether or not this provision aligns with your business’s financial strategy.
FAQs
What is the maximum amount for the Section 179 deduction in 2021?
The maximum amount for the Section 179 deduction in 2021 is $1,050,000.
Can the Section 179 deduction be used for purchasing software?
Yes, the Section 179 deduction can be used for purchasing software that is considered to be business-use.
Can the Section 179 deduction be used for leasing equipment?
Yes, the Section 179 deduction can be used for leasing equipment as long as it’s put into service the same year the tax deduction is being taken.
What happens if my equipment purchases exceed the limit for Section 179 deduction?
If your equipment purchases were more than $2,620,000, then the Section 179 deduction starts to phase out. The amount of the deduction being written off will be reduced dollar for dollar above the limit.
Can vehicles be considered for the Section 179 deduction?
Yes, business vehicles can be considered for the Section 179 deduction, but there are restrictions on the amount of the deduction. For instance, the maximum deduction for a truck is $25,900 in 2021.
Can the Section 179 deduction be used to offset the Alternative Minimum Tax (AMT)?
Yes, the Section 179 deduction can be used to offset the Alternative Minimum Tax (AMT).
Can used equipment be considered for the Section 179 deduction?
Yes, used equipment can be considered for the Section 179 deduction if it’s put into service in the same year as the tax deduction is being taken.
Can the Section 179 deduction be carried forward?
No, the Section 179 deduction cannot be carried forward to the following years.
Can I get a Section 179 deduction for purchasing a building?
No, buildings and land do not qualify for the Section 179 deduction.
What is the difference between Section 179 deduction and Bonus Depreciation?
The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment or software from their taxes in the same year of purchase while the Bonus Depreciation allows businesses to deduct a percentage of the equipment’s cost in the first year, and the remaining cost over time using depreciation.
Conclusion
The Section 179 tax deduction is a powerful tool that allows businesses to invest in their growth and achieve tax savings. While it offers several advantages, it’s essential to consider the eligibility criteria, potential drawbacks, and consult with tax professionals for proper guidance on how to leverage it.
