The section 179 deduction is a valuable tool that helps businesses deduct the cost of most tangible business equipment and other tangible property from their taxes. This article will answer some questions about how this deduction works and what it covers, so you can make an educated decision on whether or not it would be beneficial for your business. Of course, you should always consult your tax advisor for any tax advice.
In this guide, we’ll answer the following questions and more:
- What is the Section 179 Deduction?
- What is the 2021 Section 179 Deduction Limit?
- What is the 2021 Spending Cap on Eligible Equipment Purchases?
- What is the Bonus Depreciation Amount for 2021?
- How Does the Section 179 Tax Deduction Work?
- What Are the Limits of the Section 179 Tax Deduction?
- Who Qualifies for the Section 179 Tax Deduction?
- What Expenses & Equipment Qualify for the Section 179 Tax Deduction?
- What is the Section 179 Greater Than 50% Business Use Qualifying Equipment Requirement?
- What is the Difference Between the Bonus Depreciation Deduction & Section 179 Tax Deduction?
What is the Section 179 Deduction?
You may be scratching your head and wondering what Section 179 is. It’s a tax code that has been around for decades, but it can still have some people confused – so we’re going to break down all of those pesky little details for you!
With Section 179 of the IRS tax code, businesses can deduct the full purchase price of their qualifying equipment and/or software purchased or financed during a given year using IRS form 4562. If you’re looking for an incentive that encourages business investment, this is it!
Section 179 is one of the most important tax codes for small business owners. It helps businesses write off any purchases made to limit their taxable income and has helped many companies in recent years by allowing them to deduct qualifying passenger vehicles from that number. Until recently, it was often referred to as “the SUV Tax Loophole” or the “Hummer Deduction.” But those benefits have been drastically reduced over time (for current limits on vehicles qualified under Section 179, see irs.gov).
Despite the tax deduction for automobiles being smaller, Section 179 benefits small businesses more than ever. For small businesses, section 179 is one of the few government incentives that are currently available. It has been included in various Stimulus Acts and Congressional Tax Bills since its inception. Small businesses were the original target of Section 179 legislation and Bonus Depreciation deductions, but it currently benefits businesses of all sizes.
Section 179 Tax Deduction Quick Facts for 2021:
What is the 2021 Deduction Limit?
The maximum deduction for the year 2021 is $1,050,000. One thing to note about this deduction is that it’s good on both new and used equipment. You can also use it with off-the-shelf software. To qualify for the deduction in 2021, you must purchase or finance the equipment and begin to use it during the calendar year 2021.
What is the 2021 Spending Cap on Eligible Equipment Purchases?
$2,620,000 is the highest amount you can spend on equipment and still use the Section 179 deduction. After $2,620,000, the amount of the deduction begins to reduce on a dollar for dollar basis. The goal was to make Section 179 more of a tax incentive for small-sized businesses by incorporating a spending cap. So regardless of the size of your business, if an amount of more than $3,670,000 is spent on a price of equipment, that equipment won’t be eligible for the Section 179 deduction.
What is the Bonus Depreciation Amount for 2021?
Normally, a depreciation write-off is taken over the useful life of the equipment. However, current tax law allows you to write off 100% Bonus Depreciation in the year that the property was purchased and is most often used after any Section 179 spending cap is exceeded.
How Does the Section 179 Tax Deduction Work?
Before Section 179, a business could depreciate the full cost of the equipment over its useful life. So, for example, let’s say your company spends $100,000 on some machinery. In the past, it would only get to write off $20,000 per year for 5 years.
Let’s be honest. Writing off the depreciation over a few years is better than not being able to do that at all. However, it does make sense to any business owner that when you make a business expenditure, you should be able to write off the entire cost in the tax year that the equipment is purchased.
Thanks to Section 179, small businesses can purchase the equipment they need without having to wait years to write off the expenses. This tax advantage is a boon to small businesses and has made a big difference in many sectors of our economy.
Below is an example of how the 2021 Section 179 Tax business equipment deduction is calculated:
Business Property Purchase: $1,500,000
1st Year Maximum Write Off: $1,050,000
Bonus Depreciation (100% 1st year): $100,000
Normal 1st Year Depreciation: $0
Total 1st Year Deduction ($1,050,000 + 100,000 + 0): $1,150,000
Tax Savings ($1,150,000 x 21% tax rate): $241,500
Equipment Cost After Savings ($1,500,000 – $241,500): $1,258,500
What Are the Limits of the Section 179 Tax Deduction?
Section 179 is an exciting opportunity for businesses of all sizes to write off up to $1,050,000 in equipment purchases for 2021. The limit on the cost of the equipment you can buy before the write-off begins to phase out incrementally is $2,620,000 in 2021. The entire deduction is phased out once the price of the equipment purchase exceeds $3,670,000.
Who Qualifies for the Section 179 Tax Deduction?
The Section 179 Deduction is available to all businesses that buy, finance, or lease equipment costing less than $3,670,000 in the tax year 2021.
What Expenses & Equipment Qualify for the Section 179 Tax Deduction?
For the purchase to qualify as a deduction for the 2021 tax year, the qualifying property must be purchased and put into use between 1/1/2021 and 12/31/2021
Below is a brief list of business expenses that qualify for the Section 179 deduction:
- Tangible property (Could be personal property that is used for business purposes, the deduction would be based on % of time used for business/personal purposes)
- Business Vehicles weighing more than 6,000 lbs
- “Off-the-Shelf” Software (Software purchased or financed for income-generating purposes)
- Office Furniture
- Any large piece of property or equipment attached to the building but not part of its structure.
- Security systems, fire safety, roofing, and HVAC improvements to commercial buildings.
All of the items above qualify for the deduction regardless of whether the equipment purchased is new or used equipment. The only caveat is that the equipment must be a new purchase for your business.
What is the Section 179 “Greater Than 50% Business Use” Qualifying Equipment Requirement?
The Section 179 Deduction is a great benefit for businesses that purchase equipment, vehicles, and/ or software. To be eligible to claim the deduction, you must use your eligible equipment more than 50% of the time for business purposes. To calculate the deduction amount, multiple the cost of the items by the % of business use, and you’ll arrive at your deduction amount.
What is the Difference Between the Bonus Depreciation Deduction & Section 179 Tax Deduction?
Perhaps the biggest difference between the two deductions is that businesses can use the Section 179 deduction for new and used equipment. In contrast, bonus depreciation could only be used for new equipment. In the 2017 Tax Cuts & Jobs Act, the IRS updated the rule to allow bonus depreciation for used equipment purchases.
Bonus Depreciation comes into play when businesses spend more than $2,620,000 on equipment. Businesses with a net loss can still deduct some of the cost of the purchased equipment to carry forward the loss into future years.
As noted in the example calculation above, the Section 179 deduction is taken first, and then the depreciation is taken afterward. If a business has no taxable profit in that tax year, it’ll be able to carry forward the loss to future profitable tax years.
Let the Section 179 Tax Deduction Work for You!
If you’re looking for a way to offset the cost of your equipment, Section 179 is one option that can help. This deduction allows businesses to deduct most tangible property from their taxes. While this article should answer some questions about how it works and what it covers, always consult with your tax advisor before taking any steps towards utilizing section 179. Contact us if you have any questions or would like assistance in financing equipment purchases!