Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. That means that if you buy, lease or finance a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the US Government to encourage businesses to buy equipment.
When your business buys certain pieces of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a vehicle, it gets to write off $10,000 a year for five years. (These numbers are only meant to give you an example.)
Now, while it's true that this is better than no write off at all, most business owners would prefer to write off the entire equipment purchase price for the year they buy it.
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting. That's the whole purpose behind Section 179. See the table to the right for an example of the savings that could be available to you.
|2019 Equipment Purchases||$ 1,150,000|
First Year Write Off:
($1,000,000 is the maximum in 2019)
Bonus First Year Depreciation*:
(Updated to 100% via "Tax Cuts & Jobs Act")
Normal First Year Depreciation:
(20% in each of 5 years on remaining amount)
Total First Year Deduction:
($1,000,000 + 150,000 + 0)
Potential Tax Savings:
($1,150,000 x 35% tax rate)
Equipment Cost after Tax:
($1.15M less all tax savings of $402,500)
Section 179 does come with limits – there are caps to the total amount written off ($1,000,000 for 2019), and limits to the total amount of the equipment purchased ($2,500,000 in 2019). The deduction begins to phase out on a dollar-for-dollar basis after $2,500,000 is spent by a given business (thus, the entire deduction goes away once $3,500,000 in purchases is reached), so this makes it a true small and medium-sized business deduction.
All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2019 should qualify for the Section 179 Deduction (assuming they spend less than $3,500,000).
Most tangible goods used by businesses, including “off-the-shelf” software and business-use vehicles (restrictions apply, see next page) qualify for the Section 179 Deduction.
Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2019 and December 31, 2019.
Bonus depreciation is offered some years, and some years it isn’t. Right now in 2019, it’s being offered at 100%.
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is “new to you”), while Bonus Depreciation has only covered new equipment only until the most recent tax law passed. In a switch from recent years, the bonus depreciation now includes used equipment.
Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,500,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
One of the more popular uses of the Section 179 Deduction has been for vehicles. In fact, several years ago the Section 179 deduction was sometimes referred to as the “Hummer Tax Loophole,” because at the time it allowed businesses to buy large SUV’s and write them off. While this particular use (or abuse) of the tax code has been modified with the limits explained below, it is still true that Section 179 can be advantageous in buying vehicles for your business.
Vehicles used in your businesses qualify – but certain passenger vehicles have a total deduction limitation of $11,160, while other vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes qualify for full Section 179 deduction (full policy statement available at: IRS.gov).
Note: the deduction for business vehicles is the same whether they are purchased outright, leased, or financed with Section 179.
Note that because many vehicles can serve business and personal function both, the rules for business vehicle deductions are always evolving, and can be complicated. It’s easier to list the typical vehicles that will generally qualify for a full section 179 deduction, and then discuss the rules for other vehicles.
Many “work vehicles” that, by their nature, are not likely to be used for personal purposes will usually always qualify for full Section 179 deduction. This includes the following vehicles:
For passenger vehicles, trucks, and vans (not meeting the guidelines below), that are used more than 50% in a qualified business use, the total deduction including both the Section 179 expense deduction as well as Bonus Depreciation is limited to $11,160 for cars and $11,560 for trucks and vans.
Exceptions include the following vehicles:
Certain vehicles (with a gross vehicle weight rating above 6,000 lbs. but no more than 14,000 lbs.) qualify for deducting up to $25,000 if the vehicle is purchased and placed in service prior to December 31 and meets other conditions.
As stated earlier, the vagueness of business vs. personal use can be complicated. To help, please refer to page 6 of these Instructions for Form 2106 to read the exact IRS language. For complete IRS information on Depreciation and Amortization, see Instructions for Form 4562.
Vehicles can be new or used (“new to you” is the key). The vehicle must be acquired in an “arms-length” transaction, financed with certain qualified leases and loans, and titled in the company name (not in the company owner’s name).
The vehicle must also be used for business at least 50% of the time – and these depreciation limits are reduced by the corresponding % of personal use if the vehicle is used for business less than 100% of the time.
Remember, you can only claim Section 179 in the tax year that the vehicle is “placed in service” – meaning when the vehicle is ready and available – even if you’re not using the vehicle. Further, a vehicle first used for personal purposes doesn’t qualify in a later year if its purpose changes to business.
To elect to take the Section 179 Deduction, simply fill out Part 1 of IRS form 4562 and attach it to your tax return (much like any other additional form, such as a "Schedule C" or similar.)
This information is intended to be an illustration of a potential Section 179 deduction. Please consult a tax professional to determine Section 179’s applicability to your business.