What Are Section 179 Deductions?
Definition & Examples of Section 179 Deductions
Section 179 deductions allow taxpayers to deduct the cost of certain properties as expenses when used in service. When you buy property, like a vehicle or machinery, you can get tax deductions for buying and using them for business uses. These deductions are basically depreciation, which is 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 by taking a Section 179 seduction. Learn more to see if your business can take advantage.
What Are Section 179 Deductions?
Section 179 deductions allow taxpayers to deduct the cost of specific properties as expenses when those properties are used as a service.
- Alternate definition: Section 179 refers to a section of the U.S. tax code allowing for businesses to deduct property cost when eligible.
The IRS set up Section 179 deductions to help businesses by allowing them to take a depreciation deduction for certain business assets—like machinery, equipment, and vehicles—in the first year these assets are placed in service. The concept of depreciation for an asset is to spread the cost of using the asset over a number of years (the asset's useful life) by taking a tax deduction for part of the cost each year.
Section 179 deductions speed up the deduction, taking all of the cost as a deduction in the first year. In addition to taking a Section 179 deduction, you may also be able to take an additional first-year bonus depreciation of 100% on business property that is new to your business. Bonus depreciation remains at 100% until January 1, 2023.
The IRS limits the kinds of assets that can be expensed with a Section 179 deduction, as well as the amounts of the deductions. This deduction process can be complicated, so check with your tax professional if you consider taking a Section 179 deduction.
How Section 179 Deductions Work
The IRS has two general requirements for business property that is qualified for a Section 179 deduction. To begin, the property (called qualified property) must be tangible, depreciable, personal property acquired for use in the active conduct of a trade or business.
You can only use the Section 179 deduction for property used more than 50% for business purposes, and you can only deduce the percentage of business use. For example, if you buy a car for your business travel and use it 60% of the time for business, you can take a Section 179 deduction for 60% of the car's cost.
If you use a car less than half the time for business, you can't take a Section 179 deduction.
The property must also be purchased for business use and put into service in the year that 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 a gross weight between 6,000 and 14,000 pounds
- Business personal property that isn't physically attached to a building (everything from office furniture and equipment to computers to free-standing shelves)
- Listed property that can be used for both business and personal purposes
- Costs of improvements to a business building interior and for fire suppression, alarms and security systems, HVAC, and roofing
You can't take a Section 179 deduction for land and land improvements, like pools or fences. There may also be some additional restrictions and exclusions on this list, so check with your tax professional before proceeding.
How to Take a Section 179 Deduction
To take a Section 179 deduction, do the following:
- Purchase qualified property and start using it during the year.
- Sit down with your tax professional at tax time. You will need records on the date of purchase, the date you started using the property, and all costs associated with the purchase, like freight and setup.
- Add up all the items of property that are qualified.
- Take the Section 179 deduction by electing it, which is done by filling out the required form and including it in your business tax return.
The form used to report information for a Section 179 deduction is IRS Form 4562, which collects information on business property acquired and put into service. You can use it to claim a depreciation deduction, make a Section 179 election, and take a bonus depreciation deduction.
If you can take a Section 179 deduction for only part of the cost of an asset, you may be able to depreciate the cost you do not deduct. This means that you can spread out the remaining amount over the life of the property.
Annual Limits on Section 179 Deductions
For 2019 business tax purposes, the annual limits on Section 179 deductions are $1.02 million on individual items of equipment and purchased computer software and $25,500 for sport utility vehicles. Your business can spend up to a maximum of $2.55 million on Section 179 equipment. The deduction is reduced above this amount.
For 2020, the maximum deduction for an individual asset is $1.04 million, with a company total of $2.59 million. The sport utility vehicle limit is $25,900. These limits are indexed to inflation and may change each year.
- Section 179 deductions allow taxpayers to deduct the cost of certain properties as expenses when used in service.
- Section 179 refers to a section of the U.S. tax code allowing for businesses to deduct property cost when eligible.
- The property you deduct must also be purchased for business use and put into service in the year that you claim the deduction.
- For 2020, the maximum deduction for an individual asset is $1.04 million, with a company total of $2.59 million.
IRS. "Publication 946 How to Depreciate Property," Page 15. Accessed June 27, 2020.
IRS. "New Rules and Limitations for Depreciation and Expensing Under the Tax Cuts and Jobs Act." Accessed June 27, 2020.
IRS. "About Form 4562, Depreciation and Amortization (Including Information on Listed Property." Accessed June 27, 2020.