Section 179 Deduction: A Simple Guide
In the US, the Internal Revenue Service (IRS) offers businesses an array of tax deductions to ease their tax bill while, at the same time, encouraging them to invest in things that can help grow their business.
Among the most significant kinds of deductions is depreciation — letting business owners slowly deduct the costs of capital assets (like a piece of machinery) over several years and save significant sums in taxes.
However, some more inexpensive assets may not be valuable enough to make depreciation over time worthwhile to businesses.
That’s where Section 179 of the Internal Revenue Code (IRC) comes in, allowing business owners to immediately expense assets instead of depreciating them.
Below, we’ll explain Section 179, explore what kinds of items are eligible, and look at some examples.
What is Section 179?
Section 179 is a section in the IRC that lets business owners expense depreciable assets instead of capitalizing and depreciating them over time.
The IRS created Section 179 to encourage businesses to invest in specific kinds of assets that could speed up growth. These businesses can save a lot of money on their business income taxes by immediately expensing these assets instead of depreciating them.
For example, a freelancer may invest in a powerful, $2,000 computer that stretches their budget a bit. Section 179 could let them deduct part or all of that from their taxable income right away, saving them a significant sum and making it easier for them to grow their freelance business.
How is Section 179 Different From Depreciation?
Tangible assets like machinery don’t last forever. They experience wear and tear, losing effectiveness, and eventually becoming useless at a certain point.
Depreciation deductions let business owners recognize this on their taxes — they can take a tax deduction each year to represent that asset’s partial decline in value. There are plenty of depreciation methods, such as straight-line or double-declining balance.
Section 179 works a little differently. It lets you write off all or part of capital asset purchases as expenses immediately — similar to how you can write off utility payments or office supplies — instead of this gradual depreciation deduction.
Section 179: Eligibility and Rules
Maximums and Phaseouts
The Tax Cuts and Jobs Act (TCJA) doubled the maximum annual Section 179 deduction limit from $500,000 to $1 million for tax years beginning after 2017. That’s the total amount you can deduct from your taxes.
It also boosted the phase-out limit from $2 million to $2.5 million for tax years starting after 2017. That means that your allowed deduction amount begins to decrease when you exceed $2.5 million in asset purchases.
This amount increases with inflation, so for 2021, those amounts are $1,050,000 for the maximum deduction and $2,620,000 for phase-out limits.
As a result, businesses may be able to expense more asset purchases each year.
The guidance for Section 179’s eligible assets is not neat or simple. There are several requirements for assets to meet — and these can vary based on what kind of asset it is.
Additionally, numerous exceptions clarify what doesn’t qualify.
That said, we’ll cover some of the basics.
The IRS has four broad requirements for assets that qualify for the Section 179 deduction:
- It must be eligible property.
- It must be acquired for business use.
- It must have been acquired by purchase.
- It must not be property described later under What Property Does Not Qualify.
There are six general categories of assets that qualify for Section 179 deductions:
- Tangible personal property: Items you can see and feel, such as machinery and equipment (such as computers), tools, office furniture, certain appliances, off-the-shelf computer software (such as), and vehicles.
- Other tangible property (except buildings and their structural components) used as:
- An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services;
- A research facility used in connection with any of the activities in (a) above; or
- A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
- Single-purpose agricultural (livestock) or horticultural structures.
- Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
- Off-the-shelf computer software: Software that isn’t custom-made for your business — aka readily available for purchase — such as many accounting software solutions.
- Qualified section 179 real property
The property can be new or used and can be purchased or financed.
Again, you can see what property doesn’t qualify here. That page also has more guidance on a variety of specifics.
Lastly, you can only elect the Section 179 deduction on vehicles, computers, or software used for your business at least 50% of the time. Even then, you can only deduct the percentage used for business purposes.
For example, if you’re a freelancer that buys a $2,000 computer you use 50% for business, you may only be able to deduct $1,000 of that price.
However, if you only use it 10% of the time, you cannot take the deduction.
Some small businesses may have simple purchases to deduct, like a laptop. You can often do that yourself.
However, if you’re buying numerous assets of different types, you may want to consult a tax professional to figure things out.
Cut Your Tax Bill Now, Not Later, With Section 179
Business taxes can get overwhelming and complex, especially as you reinvest your profits early on to accelerate growth.
Luckily, the IRS recognizes the importance of investing in your business and offers immediate tax savings for certain asset purchases through Section 179. Just make sure to follow the rules to avoid penalties — working with a CPA may be a good idea.
With ZarMoney, you can keep track of these Section 179 assets, whether you expense part or all of its price. Try ZarMoney free for 14 days to check it out.