If you’re a small business owner, you know that taxes can be a daunting task; but did you know about the Section 179 tax deduction? This deduction is a fantastic way for small business owners to save money come tax season. In this article, we’ll be diving deep into what the Section 179 tax deduction is and how it can benefit small business owners.
What is the Section 179 Tax Deduction?
The Section 179 tax deduction is a provision in the United States tax code that allows a business to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. This deduction was created to encourage businesses to invest in themselves by purchasing new equipment, software, and machinery.
What Qualifies for the Section 179 Tax Deduction?
There are a few things that qualify for the Section 179 tax deduction:
- Equipment (machines, etc.) purchased for business use
- Tangible personal property used for business
- Business vehicles with a gross vehicle weight of more than 6,000 pounds
- Computers and “off-the-shelf” software
- Office furniture and equipment
What Doesn’t Qualify for the Section 179 Tax Deduction?
There are a few things that don’t qualify for the Section 179 tax deduction:
- Land and buildings
- Property used outside of the United States
- Property used for personal purposes more than 50% of the time
- Property leased or rented to others
What is the Maximum Deduction for the Section 179 Tax Deduction?
The maximum deduction for the Section 179 tax deduction is $1,050,000 for the 2021 tax year. This means that if your business purchases qualifying equipment and software totaling up to $1,050,000, you can deduct the full cost from your taxable income.
What are the Limits on the Section 179 Tax Deduction?
There are a few limits on the Section 179 tax deduction:
- The total amount of equipment purchased for the year must be less than $2,620,000
- The Section 179 tax deduction cannot create a net operating loss for the business
- The Section 179 tax deduction cannot be used to create or increase a business’ overall loss
What is Bonus Depreciation?
Bonus depreciation is an additional tax incentive for businesses that can be used in conjunction with the Section 179 tax deduction. Bonus depreciation allows businesses to depreciate 100% of the cost of qualifying property in the first year it is put into service.
Can Bonus Depreciation be Used with the Section 179 Tax Deduction?
Yes, bonus depreciation can be used with the Section 179 tax deduction. This means that businesses can deduct the full cost of qualifying equipment and software using the Section 179 tax deduction, and then take an additional depreciation deduction of 100% for the first year using bonus depreciation.
How does the Section 179 Tax Deduction Benefit Small Business Owners?
The Section 179 tax deduction benefits small business owners in a few ways:
- It reduces the taxable income for the business
- It frees up capital by allowing businesses to deduct the full cost of qualifying equipment and software, rather than depreciating the cost over several years
- It allows businesses to invest in themselves by purchasing new equipment and software, which can increase productivity and profitability
What is the Difference Between the Section 179 Tax Deduction and Depreciation?
Depreciation is the process of deducting the cost of an asset over several years, while the Section 179 tax deduction allows businesses to deduct the full cost of qualifying equipment and software in the same tax year. Essentially, the Section 179 tax deduction allows businesses to accelerate the depreciation process and reduce their taxable income in the current year, rather than spreading the deduction over several years.
What Happens if I Sell Equipment that was Deducted using the Section 179 Tax Deduction?
If you sell equipment that was deducted using the Section 179 tax deduction, you will need to calculate the depreciation recapture amount. This is the amount of the deduction that needs to be added back into your taxable income for the year of the sale.
What is the Deadline for Taking Advantage of the Section 179 Tax Deduction?
The deadline for taking advantage of the Section 179 tax deduction is midnight on December 31st of the tax year. This means that in order to take advantage of the deduction for the 2021 tax year, any qualifying equipment and software must be purchased or financed before midnight on December 31st, 2021.
What are the Steps to Take Advantage of the Section 179 Tax Deduction?
The steps to take advantage of the Section 179 tax deduction are:
- Purchase or finance qualifying equipment and software before December 31st of the tax year
- Make sure the equipment and software qualify for the Section 179 tax deduction
- Calculate the deduction amount using IRS Form 4562
- List the deduction amount on the appropriate tax form
- File the tax return on time
Conclusion
The Section 179 tax deduction is a fantastic way for small business owners to reduce their taxable income and free up capital. By accelerating the depreciation process, businesses can invest in themselves by purchasing new equipment and software, which can increase productivity and profitability. If you’re a small business owner, be sure to take advantage of this tax deduction before the December 31st deadline.
FAQs
1. Can the Section 179 tax deduction be used by any type of business?
Yes, the Section 179 tax deduction can be used by any type of business that purchases or finances qualifying equipment and software.
2. Can the Section 179 tax deduction be used for used equipment?
Yes, the Section 179 tax deduction can be used for both new and used equipment that meets the qualifying criteria.
3. Can the Section 179 tax deduction be used for leased equipment?
No, the Section 179 tax deduction cannot be used for leased equipment. However, businesses can still deduct lease payments as an expense.
4. Is there a limit to the number of times the Section 179 tax deduction can be used?
No, there is no limit to the number of times the Section 179 tax deduction can be used.
5. Can the Section 179 tax deduction be carried over to future tax years?
Yes, any unused portion of the Section 179 tax deduction can be carried over to future tax years.
6. What if I don’t have the cash to purchase equipment before the end of the tax year?
If you don’t have the cash to purchase equipment before the end of the tax year, you can finance the equipment. The Section 179 tax deduction can still be used if the equipment is financed.
7. Can the Section 179 tax deduction create a refund?
Yes, if the Section 179 tax deduction creates a net operating loss, it can be carried back or carried forward to create a refund.
8. Can the Section 179 tax deduction be used for assets that are not fully paid off?
Yes, the Section 179 tax deduction can be used for assets that are not fully paid off, as long as the equipment is in use and meets the qualifying criteria.
9. Can the Section 179 tax deduction be used for vehicles?
Yes, the Section 179 tax deduction can be used for business vehicles with a gross vehicle weight of more than 6,000 pounds.
10. Can the Section 179 tax deduction be amended?
Yes, the Section 179 tax deduction can be amended using IRS Form 1040X.
