What Is Section 179 Deduction?
Section 179 Deduction is one of the most popular tax programs, and it's specifically designed to help small and medium-sized businesses. This provision allows companies to deduct the full purchase price of qualifying equipment or property in the year it's bought, rather than spreading out the deduction over several years through depreciation.
The program is particularly beneficial for businesses that need to invest in new machinery, vehicles, or other assets to grow their operations. It encourages immediate investment by reducing the taxable income for the year of purchase, which can lead to significant tax savings.
However, the benefits of Section 179 are not unlimited. The deduction amount and the threshold for eligibility change each year based on inflation and legislative updates. For example, in recent years, the deduction limit has been around $1.05 million, but this can vary depending on the tax year.
It's important to note that the deduction starts to phase out when a business spends more than $2.62 million on qualifying equipment in a single year. Once the total exceeds $3.67 million, the deduction is no longer available for that year. This means larger corporations often don't benefit as much from Section 179.
Section 179 Deduction is a powerful tool that helps businesses manage cash flow more effectively. By allowing an immediate write-off, companies can free up capital that might otherwise be tied up in long-term depreciation schedules. This can be especially useful for startups or growing businesses that need to reinvest in their operations quickly.
In addition to Section 179, businesses can also take advantage of bonus depreciation, which allows them to deduct an additional percentage of the asset’s cost in the first year. Tax professionals often recommend using Section 179 first, followed by bonus depreciation for any remaining balance.
Section 179 Deduction Calculator
Our team at Equipment Radar has created a free spreadsheet to help you calculate your potential Section 179 Deduction. Whether you're buying new or used equipment, this tool can give you a clearer picture of how much you could save.
Here are the links to our calculators:
- Microsoft Excel Calculator (Download, Edit .xlsx file)
- Microsoft Office 365 Excel Calculator (Online, View Only)
- Google Sheets Calculator (Online, View Only)
Calculator Directions
We recommend downloading the Microsoft Excel version so you can edit the spreadsheet and input your own figures. The cells that you should modify are highlighted in light green. This makes it easy to adjust the assumptions based on your business needs.
What Are Deduction Limitations?
Section 179 is designed to support small and medium-sized businesses, which is why there are strict limits on how much can be deducted. In order to qualify, a business must not spend more than $3.67 million on qualifying equipment in a single tax year.
The maximum deduction allowed per year is $1.05 million. However, once the total spending on qualifying equipment reaches $2.62 million, the deduction begins to phase out on a dollar-for-dollar basis until it is completely eliminated at $3.67 million.
This phase-out mechanism ensures that only businesses with reasonable capital investments can benefit from the deduction. Larger corporations typically do not qualify because they exceed these thresholds.
It's important to remember that the Section 179 rules reset each year. If your business purchases a large amount of equipment in one year, you may want to consider spreading the purchases across two tax years to maximize your deductions.
Always consult a qualified tax professional to ensure you're following the latest guidelines and making the most of your tax strategy.
Historical IRS Section 179 Deduction Levels
| Year | Section 179 Deduction | Deduction Limit |
| 2021 | $1,050,000 | $2,620,000 |
| 2020 | $1,040,000 | $2,590,000 |
| 2019 | $1,000,000 | $2,500,000 |
| 2018 | $1,000,000 | $2,500,000 |
| 2017 | $500,000 | $2,000,000 |
| 2016 | $500,000 | $2,000,000 |
| 2015 | $500,000 | $2,000,000 |
| 2014 | $500,000 | $2,000,000 |
| 2013 | $500,000 | $2,000,000 |
| 2012 | $500,000 | $2,000,000 |
| 2011 | $500,000 | $2,000,000 |
| 2010 | $500,000 | $2,000,000 |
| 2009 | $250,000 | $800,000 |
| 2008 | $250,000 | $800,000 |
| 2007 | $125,000 | $500,000 |
Specific IRS Guidelines (Publication 946)
Where To Find IRS Forms & Official Guidance
The IRS provides detailed guidance on Section 179 Deduction in Publication 946. You can find the actual tax form here. It's essential to review these materials each year, as tax laws are subject to change.
What Equipment Qualifies?
Most tangible property used in a business qualifies for Section 179, including machinery, vehicles, furniture, and equipment. Intangible property such as software and patents can also be included.
To qualify, the property must meet the following criteria:
- It must be owned by the business.
- It must be used in the business or income-producing activity.
- It must have a determinable useful life.
- It must be expected to last more than one year.
Agricultural and construction equipment, such as tractors, excavators, and bulldozers, typically qualifies. However, rental equipment does not, as only the owner can claim the deduction.
One common misconception is that Section 179 applies only to physical assets. In fact, it can also cover intangible property like computer software.
Land / Farmland
Land itself cannot be depreciated, as it does not wear out or lose value over time. However, certain land preparation costs, such as landscaping, can be included in the depreciation schedule if they are closely tied to depreciable assets.
Sport Utility Vehicles (SUVs) & Other On-Road Vehicles
The IRS has specific rules for SUVs and other on-road vehicles. For instance, the deduction for heavy SUVs is limited to $25,900 for 2020 and later tax years. These vehicles must be primarily used for carrying passengers on public roads and weigh between 6,000 and 14,000 pounds.
Section 179 Examples For New & Used Heavy Equipment Purchases
Example 1: Used Construction Crawler Dozer Purchase
Suppose you buy a used Caterpillar D8 crawler dozer for $150,000, and it's used entirely for business purposes. Since your total equipment purchases for the year are under $1.05 million, you can deduct the full $150,000 in the year of purchase.
Example 2: Compact Tractor Purchase Used For Business & Personal Purposes
If you purchase a John Deere 120R compact tractor for $10,000, and it's used 80% for business and 20% for personal use, you can only deduct $8,000 (80% of $10,000) under Section 179.
Example 3: Power Generator Equipment Rental
Only the business that owns the equipment can claim the Section 179 deduction. So, if you rent a power generator, you cannot deduct its cost. However, you may be able to deduct the full rental expense as a business expense.
Example 4: New John Deere 870G Construction Excavator Purchase
A new John Deere 870G excavator costing less than $1.05 million can be fully deducted under Section 179. This applies to both new and used equipment, as long as it meets the eligibility requirements.
Example 5: Purchase A Used Grove Crane Over 2,000 Miles Away
Transportation costs for moving a crane from the seller to your location can be included in the acquisition cost for Section 179 purposes. This means you can add the freight charges to the total purchase price and deduct the full amount.
Important Note
This blog post is intended to provide general information about Section 179 Deduction and how it applies to equipment purchases. It is not a substitute for professional tax advice. Always consult a qualified tax accountant before making any decisions related to your taxes.
Tax laws and interpretations can change frequently, and professionals stay updated on these changes to help you navigate the complex landscape. Make sure to seek expert guidance to maximize your deductions and avoid potential pitfalls.
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