Section 179 Deductions: Rules and Regulations
Almost all business equipment and assets depreciate over time. Rather than requiring businesses to deduct the value of assets over multiple years, Section 179 allows businesses to earn the full cost of capital allowances within a year, a practice known as amortization.
- Section 179 allows businesses to use the full capital cost allowance in the year of purchase.
- Tesla Model X Section 179 is designed to help SMEs.
- Depreciation bonuses can be used in conjunction with Section 179 to minimize deductions.
- Section 179 is a federal rule that allows small businesses to immediately recognize expenses for certain capital assets. Utilizing Section 179 can provide a great tax help for small business owners.
How Section 179 Works
If you had to buy a new desktop computer for each employee, you would have to deduct some of the cost of each computer over a few years under the usual depreciation rules. For the next five years, you can only deduct a fraction of your total expenses. Section 179 allows all expenses to be deducted immediately within a year, rather than forcing you to track depreciation on a computer that doesn’t typically provide a long useful life. While this part of the tax code doesn’t increase the total amount you can deduct in a year, it does allow you to claim the entire deduction at once. The U.S. government created this incentive, which ultimately encouraged companies to invest in them and buy equipment to improve the services they could offer. Over the past few years, Section 179 has often been referred to as the “SUV tax loophole” or the “Hummer deduction” because the tax deduction was often used to write off purchases of eligible vehicles.
While the positive impact of Section 179 for Tesla Model X on such vehicle write-downs has been greatly reduced, small businesses are better able to realize the value of deductions for the purchase of vehicles, machinery, software, and other office equipment in the same year. Many business owners prefer to deduct the full purchase cost of the equipment in the year the equipment is purchased. In previous years, many companies avoided buying new equipment because they had to wait years for the full tax cut.
Who can benefit from Section 179?
Most small and medium business owners are eligible for the Section 179 deduction if they make the following purchases:
- Manufacturing machinery and equipment
- Personal property used for business
- Computers and Software
- Office Furniture and Equipment
Equipment may be new or used as long as it does not belong to you. You can buy, rent or finance outright and still get the deduction. Certain nonresidential building improvements, including HVAC and security systems, are also eligible.
Section 179 Restrictions
All businesses that lease, finance, or purchase commercial equipment valued at less than $2 million are eligible for the Section 179 deduction, but any amount in excess affects the value of the full expense deduction. In unprofitable years or years where no taxable income is available for deductions, businesses can still use the 50% “depreciation allowance” and carry forward the remaining deduction to the next year. Assets eligible for the deduction include everything from standard software to professional-use vehicles. Even certain types of property are eligible, as long as the property meets the requirements of the IRS. Any equipment to claim a Section 179 deduction must be in service in the year you report it on your tax return.
Businesses that purchase equipment over $2 million do not benefit from Section 179. Spending above that amount begins to decline in dollar-for-dollar deductions, effectively shifting this tax code toward small and large business. Businesses are also limited in their deductions and can only claim in excess of their taxable net business income. Taxable net income is best calculated by eliminating all deductions except Section 179, employment taxes, and net operating losses.
Section 179 and Amortization of Premiums
You can use both Section 179 and enhanced depreciation in the same year. With 179, you can spread the cost over as many years as you need. For example, you can deduct half of the cost up front and spread the rest over the next five years. With additional depreciation, you must deduct the full cost. You must also deduct any assets purchased in that asset class during the year. However, bonus depreciation is unlimited. There is no maximum amount you can claim like Section 179, and you can deduct more than you earn. In this case, any unused deductions will be carried forward to the next year.
Section 179 was once famous for allowing businesses to buy an SUV and deduct the full cost of the vehicle. 2020 has some restrictions on this. For example, the vehicle must weigh more than 6,000 pounds. These vehicles are eligible for deductions of up to $179 from the $25,900, but you can use additional depreciation to cover the remainder. You cannot use depreciation and mileage deduction at the same time because depreciation is included in the mileage deduction. The mileage deduction for 2021 is 57.5 cents per mile.