What is a Section 179 Deduction?
When you buy property, like a vehicle or machinery, for business uses, you can get tax deductions for buying and using them. These deductions are basically depreciation, the expense of buying property over a certain number of years. The good thing is that these deductions can save you money on your business tax return.
Even better, you may be able to take bigger deductions in the year when you first buy and begin using this property.
Updated Section 179 Tax Deductions for Businesses
The Tax Cuts and Jobs Act of 2017 (AKA The Trump Tax Cuts) increased the Section 179 benefit for businesses that buy assets and start using them. A good thing about these benefits is that they will stay the same (although indexed for inflation) over the next few years.
Effective for tax years beginning January 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital property, with a limit of $2.5 million. After 2018, the limits are indexed to inflation. Businesses can now also take this deduction for nonresidential real property (buildings) improvements. These improvements must be made after the building is in use. This includes:
Improvements to a building's interior for
- Enlargement of the building
- Elevators or escalators
- The internal structure of the building (moving walls, for example)
If these items are included in the original construction, they may be deductible expenses under a different category.
What are Section 179 Deductions?
Section 179 of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time. Taking a deduction on an asset in its first year is called a "Section 179 deduction." You can see that there is a benefit to taking the full deduction for the cost of the item immediately, rather than being required to spread out the deduction over the item's useful life.
For example, if you buy a computer or other office equipment for your office, under Section 179 you can deduct the full cost of that computer in one year. This also makes sense, because we all know that computers have a short lifetime or useful life.
Qualified Business Property for Section 179 Deductions
So what types of business property does Section 179 apply to? The IRS has two general requirements:
1. The property (called "qualified property") must be "tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business." Vehicles, and (starting in 2018) land and buildings are included.
2. The property must be purchased and put into service in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it in your business. Buying a piece of property and then letting it sit and gather dust doesn't count.
Business property purchases that may qualify for Section 179 deductions include:
- Machinery and equipment
- Business vehicles with gross vehicle weight over 6,000 lbs
- Business personal property, which is basically any type of property that isn't attached physically to a building. It's basically everything from office furniture and equipment to computers to free-standing shelves - it's sometimes called "contents."
- Listed property that can be used for both business and personal purposes. The 179 deduction is based only on the percentage of time you use this property for business purposes.
- Costs of improvements to business buildings for fire suppression, alarms and security systems, HVAC, and roofing.
There may be some restrictions and exclusions on this list, and there may be some other items that you aren't sure about. Check with your tax professional.
Annual Limits on Section 179 deductions
There are annual limits on the amount of Section 179 Deductions. For 2018 business tax purposes, the limits are:
- $1 million maximum on individual items of new and used equipment and purchased (off-the-shelf) computer software. Read more about the requirements for applying a Section 179 deduction to sport utility vehicles.
- Your business can spend up to a maximum of $2.5 million on Section 179 equipment. The deduction is reduced above this amount.
After 2018, these limits will be indexed to inflation.
If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. This means that you can spread out the remaining amount over the life of the property.
How to Take a Section 179 Deduction
1. First, you purchase qualified property and start using it during the year.
2. Then, you sit down with your tax professional at tax time. You will need records on the date of purchase, date, you started using the property, and all costs associated with the purchase (like freight and setup).
3. You add up all the items of property that are qualified. You will need to read the IRS information carefully to make sure your property is qualified.
4. Then you can take the 179 deduction by electing it (described below). The amount of the deduction is the total cost of all of the property, up to $500,000 for each individual item of property. The total Section 179 deductions for all property can't exceed the $2 million maximum.
Use IRS Form 4562 to Elect a Section 179 Deduction
The form used to report information for a Section 179 deduction is IRS Form 4562. This form collects information on business property acquired and put into service (see above). For more details on completing Form 4562, see the IRS instructions for this form.
For More Information on Section 179 Deductions
Get more information on types of property qualified and excluded and other information, from IRS Publication 946: Depreciation.
Disclaimer: Section 179 deductions are complicated. The information in this article, and on this site, is not intended to be tax or legal advice. Each business situation is different and tax regulations change frequently. Please consult your tax professional before buying property with the intent to take a Section 179 deduction.