Section 179 Deduction: Rules and Limits

What is Section 179?

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.

How Section 179 works

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:

• You get your deduction sooner.
• You don’t have to track current and accumulated depreciation over the equipment’s life. 

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.

What purchases qualify for Section 179?

Most small and midsize business owners qualify for Section 179 deductions if they make qualifying purchases like the following:

• Machines and manufacturing equipment
• Personal property that is used for the business
• Computers and software
• Office furniture and equipment

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: 

• Any equipment declared for the Section 179 deduction must be put into service during the tax year for which you take the deduction. 
• The equipment can be new or used, as long as you haven’t previously owned it.
• You can purchase the equipment outright or lease or finance it and still qualify for the deduction.
• You cannot take Section 179 deductions for real property, such as land and buildings. However, some building improvements now qualify for the deduction.

Section 179 limits

Note the following Section 179 limits: 

• Value limit: All companies that lease, finance or purchase business equipment valued at less than $3,050,000 for 2024 qualify for the Section 179 deduction ($2,890,000 for 2023). The maximum deduction is limited or phased out above that amount.
• Net income limit: Your Section 179 deduction cannot exceed your net taxable business income. Net taxable income is calculated as gross income reduced by all business deductions, with the exception of Section 179, employment tax and net operating losses.

Section 179 and bonus depreciation

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:

• Percentage vs. dollar amount of deduction. Bonus depreciation allows you to deduct a percentage of your asset’s cost upfront. Section 179 allows you to deduct a set dollar amount.
• Qualifying assets. You generally cannot use Section 179 to depreciate real property except for qualified “improvement property.” In contrast, bonus depreciation is available for qualified residential real estate and vacation property.
• Annual limit on the annual deduction. For 2024, the maximum Section 179 deduction is $1,220,000 ($1,160,000 for 2023). In contrast, bonus depreciation is limited to 80 percent for 2023 (60 percent for 2024). The Tax Cuts and Jobs Act of 2017 temporarily allowed bonus depreciation of 100 percent; however, the provision is scheduled to be reduced by 20 percent per year until it is completely phased out.
• Limit by net business income. You can only take a Section 179 deduction up to the amount of your net business income for the year. Bonus depreciation is not limited by your net business income.

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 deductions for vehicles

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.

Section 179 deduction strategy

Good tax planning usually means balancing two objectives:

1. Take deductions as soon as possible, all else being equal. 
2. Take deductions when they provide you the most benefit, usually when your business is making higher profits and may be in a higher tax bracket.

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:

• Your business has high income and tax rates now. If your business has a high net income for the current year, you generally want to reduce your net taxable income as much and as soon as possible. It’s probably better to get a benefit now rather than later.
• Your business is expected to have higher income in the near future. If you’re just starting a business or going through a downswing, you may not receive the maximum benefit from the deductions now. Consider taking little or no Section 179 deduction this year so you can match depreciation deductions with the years you expect to be in a higher tax bracket.

Section 179 deductions are a valuable tool

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.