What is the Section 179 Deduction?

The Section 179 deduction allows businesses to deduct the full cost of qualifying equipment in the year it was bought instead of depreciating it over several years. This encourages businesses to invest in new equipment by providing immediate tax relief but can also be particularly helpful for small and medium-sized businesses.

If you need to make high-cost purchases to invest in your business but also need to reduce your tax bill for the year, Section 179 can be a powerful tool to lower your tax liability and improve cash flow.

The Section 179 deduction may be particularly helpful for you if you’re:

• A small to medium-sized business making a significant investment in needed equipment.
• Planning a major upgrade or expansion.
• A growing business that has had a particularly profitable year (with high taxable income) and want to reduce the year’s tax bill.

Taking the full Section 179 deduction can dramatically reduce your tax burden for the year and free up cash to reinvest into your business.

It’s important to consult a tax professional when making any large purchase, but here are a few things you’ll want to know if you’re considering taking the 179 deduction.

Table of Contents:

• What is the Section 179 deduction?
• Do I qualify for the deduction?
• Why it can pay to upgrade now
• How do I take the deduction?
• What assets are eligible?
• Other things to consider
• What is the deadline?
• Still have questions?
• FAQs

Do I Qualify for the Deduction?

If you run a business that has bought under $1,220,000 in new or used equipment during the tax year, you are likely eligible for the full 179 deduction.

If you spend above $1,220,000 but below $3,050,000, you can still take the deduction up to the $1,220,000 limit and use bonus depreciation to cover 60% of the remaining amount in the 2024 tax year. That means that 60% of the remaining cost would also be deducted from your gross income. Whether you’re eligible for the full deduction or only a partial deduction, this could provide huge up front financial relief.

It’s only when you exceed $3,050,000 that you no longer qualify for a 179 partial deduction. However, the deduction decreases dollar-for-dollar for purchases above the $1,220,000 limit, even if you still qualify for a partial deduction. This means that for each dollar you spend above $1,220,000, your deduction decreases by the same amount.

Say you buy tractor or skid steer equipment that costs $1,320,000 ($100,000 over the $1,220,000 max limit to qualify for the full deduction). Instead of receiving the full $1,220,000 deduction, you’ll receive a $1,120,000 deduction.

Let’s break it down:

1. Total Purchase Amount: $1,320,000
2. Full Deduction Limit: $1,220,000
3. Amount Over the Limit: $100,000
4. Adjusted Deduction: $1,120,000 (after subtracting the $100,000 overage from the $1,220,000 limit.)

This phase-out rule is designed to limit the benefit of the deduction to small and medium-sized businesses.

Why it Can Pay to Upgrade Now

The limit may vary annually based on IRS guidelines, but for the 2024 tax year you can deduct up to $1,220,000 from your gross income under Section 179. This can significantly reduce your taxable income for the year, which means you pay taxes on a smaller amount.

Had a profitable year? You might face a big tax bill. The 179 deduction helps you invest in your business while keeping taxes manageable. Taking advantage of the deduction now is the only way to guarantee that you’ll still qualify or that your savings will be the same.

Another reason you may want to go ahead and upgrade or expand your equipment now is because any leftover asset cost beyond the $1,220,000 limit will no longer be covered by bonus depreciation. As we mentioned earlier, bonus depreciation for the 2024 year is set at 60%, down from 80% in 2023. This is part of a scheduled phase-out of bonus depreciation under the Tax Cuts and Jobs Act, which reduces the percentage by 20% annually until it is eliminated entirely by 2027. Section 179 and bonus depreciation can often be combined, providing flexibility in managing your deductions––but only until it’s phased out. Even waiting one year will see bonus depreciation set at only 40%.

Buying what you need now can really pay off if you want to invest in the tools you need to grow your business without being slammed by a huge tax bill that you may not have the funds to cover yet.

How Do I Claim the Section 179 Deduction?

Taking the 179 deduction is pretty straightforward and can be claimed when you file your annual tax return by completing Part 1 of the IRS Form 4562. This applies whether you’re filing on time or with an extension, as long as the equipment was bought and used between January 1st and December 31st of that tax year.

What is the Deadline?

To take advantage of the Section 179 deduction, all qualifying assets must be purchased or financed and put into use for your business by December 31st of the tax year you're claiming the deduction for.

Timing is crucial when deciding whether to buy equipment now or wait for the new year because tax laws often change from year to year. Knowing these deadlines will also help you plan what and how much to purchase in a given year to make smart financial decisions for your business.

What Types of Purchases Are Eligible?

• The 179 deduction covers a wide range of assets, including vehicles, skid steer and tractor attachments, farm equipment, machinery, and smaller items like office furniture, computers, copiers, and software.
• Both used and new equipment qualify for the deduction and bonus depreciation, as long as the equipment is new to you.
• Only equipment used for your business can be claimed. If the equipment is used for both business and personal use, it must be used for business at least 50% of the time to qualify for Section 179.

Still Have Questions? Talk to a Tax Professional

Claiming the Section 179 deduction can open up huge growth opportunities that would otherwise be out of reach for small to medium-sized businesses, and you may want to act while these options are still available. It’s important to discuss these decisions with a qualified tax professional who can help you make the right choice for your specific situation. Hopefully this information has armed you to go in prepared to discuss your options.

FAQs

1. What is Section 179?

Section 179 is a tax deduction that allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year, instead of depreciating it over time. This can provide immediate tax relief and prevent a large tax bill you may not be prepared for at the moment.

2. What types of assets qualify?

Most tangible goods, such as machinery, skid steer and tractor attachments, equipment, office furniture, vehicles, and business-use technology qualify if purchased and put into use during the tax year.

3. What is the deduction limit for Section 179?

The limit may vary annually based on IRS guidelines, but for the 2024 tax year, the limit is $1,220,000 to receive the full deduction. If you purchased above $1,220,000 but below $3,050,000, you can still take the deduction up to the $1,220,000 limit and use bonus depreciation to cover 60% of the remaining amount. However, the percentage for bonus depreciation is phasing out by 20% each year and will be eliminated by 2027.

4. Is used equipment covered under the 179 deduction?

New and used equipment is covered under the 179 deduction, as long as the equipment is new to you and expected to last for more than one year.

5. Does Section 179 apply to all businesses?

Section 179 applies to most small and medium-sized businesses, so companies that spend above the annual limit on qualifying equipment may not be eligible for the full deduction.