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Tax Planning

Take a Tax Deduction Today Not Tomorrow – IRS Section 179… Hello My Friend Again

  • Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software bought or financed during the tax year, up to a specified limit
  • Often Confused with “Bonus Depreciation,” albeit there are different benefits and rules that taxpayers need to know
  • Fell out of favor after IRS Section 168(k) “Bonus Depreciation” increased to 100%, albeit as of tax year 2024, Section 168 is now at 60%, making Section 179 attractive to many
  • Understanding the limits is key to maximizing your tax strategy
  • Can be used in combination with Section 168 “Bonus Depreciation” for maximum flexibility

What is Section 179?

Section 179 lets businesses deduct the cost of certain types of property in the year the asset is placed in service, rather than depreciating the cost over several years. This is often referred to as “expensing” equipment, providing immediate tax relief.

Key Rules for Section 179

  • Qualifying Property – The property must be INCOME producing for your business

In order to be “income producing” the purpose of the property must be such that it helps in some way for your business to make money. Often referred to as ordinary and necessary.

For example, a computer that allows someone at the business perform work is generally a good example. Machinery to make the products, and a work desk are all ordinary and necessary as long as they are reasonable. An example of something that may not qualify is an airplane that is used by the CEO or owner of the company to make only a few business trips a year, while the rest of the year it’s used for personal trips (although the partial use is maybe able to be deductible as a percentage). 

    • Tangible personal property such as machinery, equipment, furniture, and vehicles used in business operations qualify.
    • Off-the-shelf software also qualifies. This is software that is readily available for purchase and isn’t custom-made.
    • Business vehicles must meet specific requirements, with a weight limit typically above 6,000 pounds gross vehicle weight (GVW). The vehicle does not need to be new, although the business use must be over 50%
    • Improvements to non-residential property, such as HVAC, roofs, alarm systems, and security systems, can also qualify under certain conditions. When it comes to HVAC and other commercial building improvements, it’s important to talk with a tax professional because there are so many different ways to approach expense and amoritization deductions that one article isn’t going to cover it all.
  • Purchase Date
    • The property must be purchased and put into service during the same tax year in which the deduction is claimed. In other words, simply purchasing the income producing property is NOT ENOUGH. It must be placed in service and ‘running’ during the tax year in question. This often limits businesses from purchasing at the end of the year in hopes of taking a last minute deduction because if the property requires further work, such as installation, it generally does not qualify for a Section 179 deduction.
  • Deduction Limit
    • For the 2024 tax year, businesses can deduct up to $1,180,000, up from $1,160,000 in 2023. This limit has historically been adjusted annually for inflation.
  • Spending Cap
    • The total amount spent on qualifying property in a given tax year cannot exceed $2,890,000 (for 2023). If spending exceeds this amount, the deduction is reduced dollar-for-dollar.
  • Bonus Depreciation
    • If a business spends more than the Section 179 limit, they can use bonus depreciation to deduct 100% of the remaining value of qualified assets, after accounting for the Section 179 deduction. Bonus depreciation can be applied to both new and used equipment. As of this writing in 2024, the Sec 168 bonus depreciation is 60% and can be used in combination with Sec 179. Also, as of this writing, there is a bill making its way through Congress that, if passed, will bring back 100% depreciation in the first year. Because Sec 168 Bonus Depreciation allows for a company to realize a loss, it’s particularly popular in cases where one business loss can offset income from another source of income (for example another business and/or W2 income from a spouse)
  • Business Use Requirement
    • The property must be used for business purposes more than 50% of the time. If not, the deduction must be prorated based on the business-use percentage.
  • Exclusions
    • Section 179 generally does not cover real estate, including rental property. It also excludes air conditioning and heating units used in residential properties.
    • Leased property, intangible assets, and any assets primarily used outside the United States typically do not qualify.

Benefits of Section 179

  1. Immediate Tax Savings
    • Rather than waiting for depreciation over several years, IRS Section 179 provides immediate tax savings and relief by allowing businesses to deduct the full cost of qualifying assets and property in the year they are purchased.
  2. Encourages Capital Investment
    • This provision incentivizes small to medium-sized businesses to invest in new equipment and technology, boosting productivity and growth. Especially for newer businesses that may not have financial capacity to obtain property without the immediate financial tax benefits of expensing vis-a-vis amortization and deducting income over multiple tax years.
  3. Improves Cash Flow
    • By allowing a full deduction upfront, IRS Section 179 can significantly improve cash flow, freeing up funds for other investments or business operations. In combination with asset and equipment loans and funding, a business can more easily grow, become, and remain profitable. With proper planning, knowing how to best take advantage of the tax code allows a business owner much more flexibility.
  4. Flexible Application
    • Businesses can choose how much of the purchase to expense using Section 179, allowing flexibility in managing taxable income and tax planning. This fact cannot be overstated. Often, not having to choose between all-or-none approach is advantageous when considering marginal tax rates for the year in question, along with future tax years.
  5. Benefit to Small Businesses
    • The deduction limits are tailored to small and mid-sized businesses. Larger corporations typically cannot take full advantage of Section 179 due to the spending limits imposed. Because my focus is on small business taxation at 1 Reason, I am well positioned to assist and advise your business on maximizing your personal and/or your business after tax income.

Section 179 and Bonus Depreciation: Combined Benefits

Many businesses use both Section 179 and bonus depreciation to maximize deductions. For example, if a business purchases $3 million in equipment:

  • The business can use the full Section 179 deduction of $1,160,000.
  • The remaining $1,840,000 can qualify for bonus depreciation, allowing an immediate 100% (currently as of this writing in tax year 2024, it would not be a full 100%) write-off of the remaining amount in the same year.

Example

A small manufacturing business buys $1 million worth of new machinery in 2023. Assuming the machinery qualifies under Section 179 and the business has taxable income to offset, the company can deduct the entire $1 million from its taxable income in 2023, reducing its tax liability significantly.

Limits on Deductions and Income

  • The Section 179 deduction cannot create a net operating loss. In other words, the total deduction cannot exceed the business’s taxable income for the year.
  • However, any unused deduction can be carried forward to future tax years.
  • By combining the IRS Section 168 Bonus Deduction with the Section 179 deduction, it’s possible to reduce the business income to the point of creating a net operating loss that may generally be used against other taxpayer income. Facts and details matter though, and careful planning is required.

How to Claim Section 179 Deductions

To claim a Section 179 deduction, businesses must fill out Form 4562, which is filed with their tax return. This form captures all the details about the assets purchased, the amount of the deduction claimed, and whether the property qualifies for the Section 179 expense deduction.

Conclusion

Section 179 is an excellent tool for small and mid-sized businesses owners to reduce their tax burden and maximize the after tax income, while also growing and investing in their business operations. By understanding the limits, qualifying purchases, and how it integrates with bonus depreciation, a business owner should not dismiss the flexibility offered in the IRS tax code.

If you would like to discuss further how your businesses can leverage Section 179 to gain immediate financial benefits, improve cash flow, and foster long-term growth, feel free to reach out and we can analyze your particular facts and how the tax code applies to you..