Section 179 of the Internal Revenue Service (IRS) Code offers many businesses a useful tax deduction. If your business purchases equipment, you can take an immediate deduction for the tax year in which the purchase is made.
Because of the nature of Section 179, it’s a deduction all business owners should be aware of. It can save most businesses that purchase equipment a lot of money on taxes.
Section 179 offers one of many ways business owners can save on their taxes. In this article, we will go over:
- What exactly Section 179 is
- How business owners can use the deduction
- Which expenses qualify
What is Section 179?
Section 179 is a tax deduction on qualifying business equipment purchases. It serves as an incentive for small business owners. The idea is that offsetting the cost of equipment through a tax deduction enables small businesses to grow.
New equipment is one of the most common but expensive purchases small businesses make. Apart from real estate, it serves as one of the critical investments that leads directly to growth for businesses in many industries. Section 179 is designed to deduct the full cost of such capital assets as an alternative to depreciating them over their lifetime.
For this reason, Section 179 is limited to several categories of critical expenses, which we will list soon. Many of those items are very expensive and the deduction is immediate upon the purchase. This means that Section 179 is useful to a very wide range of small businesses.
Which expenses qualify for Section 179?
Section 179 can be used for deductions on “qualifying property.” Most types of business equipment should qualify for the deduction. It applies both to items you purchase and those you finance, but not to items you are leasing.
There is a “gray zone” for which expenses qualify under Section 179. According to the official website for Section 179, the categories are:
- Equipment (machines and other) purchased for business use
- Tangible personal property used for business purposes
- Business vehicles weighing over 6,000 pounds
- Computers (all “off the shelf” software)
- Office equipment
- Office furniture
- Property attached to your building, but which is not a structural component of it
- Large manufacturing tools
- Printing press
- Some improvements to the building, such as HVAC, alarms, and roofing
- Items of “partial business use” (used both personally and for your business)
How can I get a Section 179 deduction?
To qualify for a Section 179 deduction, your purchase must be made between January 1st and December 31st of the year you are making a claim for. You must also start using the purchased property during that same year to claim the deduction. For example, if you purchase it in December 2022 but start using it in January 2023, you must wait until the 2023 tax filing season.
You can claim Section 179 on Part I of Form 4562. On the form you will need to include a short description of the property. You will include its cost and business purpose. Then you will enter the dollar amount that you are claiming for the asset on Line 6. If you do not have enough room to fill in all of your items, you can attach a list to your Form 4562.
Does it qualify: your checklist
To make matters simple, here are the basic requirements for each item you want to deduct under Section 179:
- Must be purchased: It’s fine if you financed your purchase and are still paying back the loan. But you may not deduct property that you’re just leasing.
- At least 50% of use is for business: For personal property or tangible personal items purchased for business use, at least half of its use should be for the business. If it’s only occasionally used by the business, it does not qualify.
- Not purchased or acquired by relatives or related parties: This includes your parents, siblings, spouse, grandparents, descendants, and their respective businesses. Property purchased by a trust or charity you have a relationship with also does not qualify.
- Tangible: This includes most physical property and computer software. Intangible property, including patents, copyrights, and others, do not qualify. Attached buildings and all property transactions do not qualify, but some attached equipment and structures can.
- Used in the same tax year: You must use the property during the tax year for which you are claiming a Section 179 deduction.
Section 179 limitations
Apart from these basic qualifications, there are also some limitations that you must be aware of.
Your deduction will be based on your business’s net income for the tax year. You can’t deduct more than your total revenue. If you purchased more than the total of your revenue’s worth of equipment, you can only deduct up to your entire revenue.
For this reason, if you run a startup that needs a lot of equipment, it can be worth it to time your purchases. By spreading your purchases into two tax years instead of one, your deduction limit is much higher.
The other milestone that you should be aware of is the $2,700,000 spending cap on capital equipment. This is slightly higher than 2021’s $2,620,000. If you spend more than this amount, your maximum deduction is reduced accordingly.
The deduction limit for 2022 is $1,080,000. This is the total amount you can deduct. If you spend more than the limit, your deduction is reduced on a dollar-for-dollar basis. That means if you spent $2,800,000, you could deduct only $980,000. In this case, you are $100,000 over the spending limit, so you can claim the maximum deduction ($1,080,000) minus the $100,000.
The Section 179 deduction is relatively simple and easy to claim. It’s also an important one, so you should make sure you take full advantage of it. This deduction can help facilitate a business’s expansion, or just take a load off your business’s back when you make a necessary, applicable purchase.