Most people think the Section 179 deduction is some mysterious or complicated tax code. It really isn't, as you will see below.
Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
Several years ago, Section 179 was often referred to as the "SUV Tax Loophole" or the "Hummer Deduction" because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV's and Hummers). But, that particular benefit of Section 179 has been severely reduced in recent years, see 'Vehicles & Section 179' for current limits on business vehicles.
Today, Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps small businesses. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses - and millions of small businesses are actually taking action and getting real benefits.
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it's true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting over the next few years. That's the whole purpose behind Section 179 - to motivate the American economy (and your business) to move in a positive direction. For most small businesses, the entire cost can be written-off on the 2023 tax return (up to $1,600,000).
Now in 2023, the Section 179 deduction limit has been raised to $1,160,000! This means your business can now deduct the entire cost of qualified equipment up to a total equipment purchase limit of $2.8 million.
All businesses that purchase, finance, and/or lease less than $2,800,000 in new or used business equipment during tax year 2023 should qualify for the Section 179 Deduction.
Most tangible goods including "off-the-shelf" software and business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. For basic guidelines on what property is covered under the Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2023 and December 31, 2023.
The deduction begins to phase out if more than $2,800,000 of equipment is purchased - in fact, the deduction decreases on a dollar for dollar scale after that, making Section 179 a deduction specifically for small and medium-sized businesses.
What's the difference between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn't. Right now in 2023, it's being offered at 50%.
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only.
Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,800,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
Hurry! You must purchase your new truck(s) before December 31, 2023 to qualify!