What Is Section 179 Deduction?
Section 179 Deduction is one of the most popular tax programs, specifically designed to help small and medium-sized businesses. This provision allows businesses to reduce their current year's tax liability by deducting the full purchase price of qualifying equipment or property in the year it is acquired. It’s a powerful tool for those looking to invest in productive assets like machinery, vehicles, and more.
The goal of Section 179 is to stimulate economic growth by encouraging business investment. However, the benefits are limited—once a company spends over $2.62 million on eligible purchases, the deduction begins to phase out. This means that only businesses with smaller capital expenditures typically benefit from this program.
Normally, businesses would depreciate long-term assets over several years, which limits how much they can deduct each year. Section 179 changes that by allowing immediate expensing of up to $1.05 million (as of 2023), giving businesses a significant tax break right away.
Many businesses take advantage of this during the fourth quarter, as it helps them optimize their tax bills. By purchasing equipment before the end of the year, they can claim the deduction in the same year, improving cash flow and enabling further investments in growth areas such as expansion, employee benefits, and R&D.
From an economic standpoint, Section 179 plays a key role in driving demand for machinery and equipment. It encourages companies to upgrade their tools and technology, leading to increased productivity and efficiency across industries.
In addition to Section 179, businesses may also use bonus depreciation to further reduce their taxable income. Tax professionals often recommend using Section 179 first, followed by bonus depreciation on the remaining balance.
Section 179 Deduction Calculator
To make it easier for you to calculate your potential Section 179 deduction, our team at Equipment Radar has created a free downloadable spreadsheet. You can use it to estimate how much you could save by investing in qualifying equipment.
Here are the links to the 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 Excel version so you can edit the spreadsheet and input your own figures. The cells that need to be changed are highlighted in light green. Feel free to adjust assumptions based on your business needs.
Understanding Deduction Limitations
Congress established Section 179 to support small and medium-sized businesses. However, there are limits in place. Each year, businesses can deduct up to $1.05 million in qualifying equipment, but this benefit starts to phase out when total purchases exceed $2.62 million.
Once the threshold reaches $3.67 million, the deduction is completely eliminated. This means that businesses must plan carefully to maximize their benefits while staying within these limits.
The chart below illustrates how the deduction decreases as purchases increase beyond the $2.62 million mark.
Source: Equipment Radar and IRS
Key takeaway: The Section 179 deduction is reduced dollar-for-dollar once you exceed $2.62 million in purchases.
Remember, the deduction resets each year, so it’s important to reassess your eligibility annually. If your business spends just under the $3.67 million limit, you might consider splitting purchases between two tax years to fully utilize the deduction.
Historical Section 179 Deduction Limits
| Year | Section 179 Deduction | Deduction Limit |
| 2023 | $1,050,000 | $2,620,000 |
| 2022 | $1,050,000 | $2,620,000 |
| 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 |
IRS Guidelines (Publication 946)
Where To Find IRS Forms & Official Guidance
The IRS provides detailed guidance on Section 179 deductions through Publication 946. This document outlines the rules, requirements, and forms needed to claim the deduction. Since tax laws can change, it’s essential to review the latest information each year.
What Equipment Qualifies?
Most tangible property used in a business qualifies for Section 179, including machinery, vehicles, furniture, and software. However, land does not qualify because it doesn’t depreciate. Intangible assets like patents and copyrights may also be eligible.
To qualify, the property must meet the following criteria:
- It must be owned by the business.
- It must be used for business or income-producing purposes.
- It must have a determinable useful life.
- It must last longer than one year.
Heavy equipment, such as tractors, excavators, and cranes, is commonly eligible. However, rental businesses cannot claim the deduction unless they own the equipment.
Another point to note is that Section 179 isn’t limited to physical assets. Software and other intangible assets can also be included.
Land / Farmland
Land itself cannot be depreciated because it doesn’t wear out. However, costs associated with preparing the land—like landscaping or clearing—can be depreciated if they are closely tied to depreciable property.
SUVs & Other On-Road Vehicles
The IRS has specific rules for vehicles. For example, heavy SUVs placed in service after 2020 are limited to a $25,900 deduction. These rules were added to prevent large vehicles from being fully expensed under Section 179.
Examples of Section 179 Deduction
Example 1: Used Construction Crawler Dozer
If you purchase a used Caterpillar D8 dozer for $150,000 and use it entirely for business, you can deduct the full amount under Section 179.
Example 2: Tractor Used for Business and Personal
If a tractor is used 80% for business and 20% for personal use, only 80% of the cost is eligible for the deduction.
Example 3: Rental Equipment
Only the owner of the equipment can claim the deduction. Renters can usually deduct the full rental expense as a business expense instead.
Example 4: New Excavator Purchase
A new John Deere 870G excavator costing less than $1.05 million can be fully deducted under Section 179.
Example 5: Transporting a Crane
Transportation costs for heavy equipment can be included in the total acquisition cost, making them eligible for the deduction.
Important Note
This blog post is intended to provide general information about Section 179 deductions. It is not a substitute for professional tax advice. Always consult a licensed tax accountant for guidance tailored to your specific situation.
Tax laws can change frequently, and interpretations can vary. Professionals stay updated on these changes and can help you navigate the complexities of the tax code.
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