accountable plan cash and calculator to determine how much is paid
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..