Understanding the Section 179 Business Equipment Deduction

Section 179 of the Internal Revenue Code (IRC) is one of the few tax breaks specifically geared toward small and medium-sized businesses regarding business equipment deduction. Under Section 179, a business can write off the purchase of equipment, vehicles, off-the-shelf software, and other qualifying property (up to the maximum allowed) during the tax year in which the equipment is purchased, rather than depreciating it over time. Cut Your Taxes

In an effort to stimulate the faltering economy, the maximum allowed deduction under Section 179 was increased to $500,000 for tax years 2010 through 2014. Because Congress did not act to extend the higher deduction, it was reduced back to $25,000 for tax year 2015. But even though the deduction has been reduced, it can still be a major tax benefit for many small businesses.

Here is an example of how Section 179 may help a small business. Let’s say you run an office and decide to purchase a new copy machine for $10,000. Normally, you would need to depreciate that purchase over several years, deducting a portion of the purchase each year. Section 179 allows you to deduct the entire cost of the copier during the year in which you purchase it, thus reducing the taxable income for your business that year by $10,000.

What Property Qualifies for Section 179 Expensing: Businesses are allowed to deduct the cost of new and used equipment, machinery, computers, software, vehicles and office furniture that is used primarily (meaning more than 51% of the time) for business. As long as the IRS deems that the property is likely to last more than one year and it is “new to you”, it is an acceptable purchase under Section 179.

This deduction has been modified in recent years to place certain restrictions on vehicle purchases. In order to address the so-called “SUV loophole”, the expense deduction has certain limits: $11,060 for most cars and $11,160 for most trucks and vans. Vehicles that are not subject to these limitations include ambulances, taxis, transport vans and other more specialized vehicles.

Though Section 179 covers a wide range of potential business purchases, there are several types of property that are excluded from this deduction, including:

  • Land purchased for the business
  • Permanent structures such as buildings, garages, fences, swimming pools, and paved parking lots
  • HVAC units
  • Regular business inventory
  • Intangible property; including trademarks, copyrights and patents
  • Property that is used outside of the U.S.

What are the Restrictions on Section 179 Expensing: As mentioned earlier, in addition to the vehicle restrictions, the total amount businesses can deduct under Section 179 for tax year 2015 is $25,000. Also, there is a limit to the amount of total equipment a business is allowed to purchase, finance or lease in order to qualify for the deduction. In 2015, that limit is $200,000. If a business purchases in excess of $200,000 in qualifying property, the allowed deduction (of $25,000) decreases dollar for dollar for every dollar spent over and above the allowed maximum.

Because the deduction limits for Section 179 have dropped significantly in 2015, many are under the mistaken impression that there is little benefit left for small businesses. The fact is this tax break can still be very helpful in allowing you to finance various equipment upgrades and expensing them during the current tax year. For further information about how Section 179 can benefit your business, speak with your local tax professional.

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