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Learn when this deduction is the best choice for tax benefits.
Section 179 is a federal rule intended to help small and medium-sized businesses by allowing them to receive specific tax benefits sooner if they choose to do so. If you purchase assets for your business during the tax year, you may benefit from the deduction allowed by Section 179.
We’ll explain more about Section 179 and how it works to help business owners decide if it’s their best option for tax benefits.
Section 179 is part of the U.S. tax code. It allows business owners to deduct some or all of their costs for certain types of assets like equipment in the year they buy or put them into service.
Under standard depreciation rules, businesses deduct costs over several years. For example, according to the IRS, if they purchase equipment with a useful life of seven years, they generally deduct a portion of the asset’s cost over those seven years. This structure is designed to match the asset’s business benefit to the years it was useful.
However, by utilizing Section 179, businesses may immediately deduct equipment expenses in the same year the equipment is purchased. This lowers their taxable income and they receive a tax benefit sooner.
The U.S. government created Section 179 rules to stimulate the economy by incentivizing companies to invest in themselves and buy equipment.
Section 179 doesn’t increase the total amount you can deduct in a single year. Instead, it allows you to benefit from the deduction all at once.
Here’s an example of how Section 179 works: Say you purchase new computers for all your employees. Under regular depreciation rules, you’d deduct a fraction of each computer’s cost over multiple years. However, under Section 179 rules, you can immediately deduct the entire expense in a single year.
The Section 179 deduction has several advantages:
Section 179 has been referred to as the “SUV tax loophole” or “Hummer deduction” because it was often used to write off the purchase of qualifying vehicles.
The positive impact of Section 179 has been reduced significantly for such vehicle write-offs (more on this later). However, small businesses are in a better position to realize the value of deducting business expenses in the same year for purchases of vehicles, machinery, software and other office equipment.
Most small and midsize business owners qualify for Section 179 deductions if they make qualifying purchases like the following:
Assets eligible for deduction include anything from off-the-shelf business software to business-use vehicles. Some property improvements are eligible, including repairs and upgrades to roofs and heating, ventilating, air conditioning and business security systems.
Additional parameters include the following:
Note the following Section 179 limits:
Bonus depreciation (also known as additional first-year depreciation deduction) and Section 179 are both methods for taking an immediate deduction for assets you purchase or place in service. However, there are a few key differences:
With both bonus depreciation and the Section 179 deduction, any deduction you do not take in the first year is forwarded to the following years.
Section 179 has been known for allowing a company to purchase an SUV and deduct the entire cost of the vehicle. However, this ability was limited in 2020. Now, the vehicle must have a gross vehicle weight rating (GVWR) between 6,001 and 14,000 pounds, and you’re allowed a maximum Section 179 deduction of $30,500 for 2024 ($28,900 for 2023). You may be able to use bonus depreciation for the remaining cost.
If you take a Section 179 deduction or depreciation deduction for a vehicle, you must use actual expenses to calculate your vehicle deduction for the remaining life of the vehicle — instead of the standard mileage deduction.
Good tax planning usually means balancing two objectives:
Section 179 allows you to choose whether to take some or all deductions for asset purchases now or over the next several years. Consider these scenarios:
As with all business decisions, planning ahead is essential. By learning about Section 179 deductions, you can make the best decisions about when to buy business assets — and how you should deduct the cost of those assets to receive the maximum benefit for your business.
Dock Treece contributed to this article.