Balancing your expected taxes, spending, and saving can be a headache for any business owner. Budgeting and tax planning go hand in hand managing the financials of a business.
While there are several federal tax deductions to take advantage of when planning your annual expenses, one of the most beneficial of these is known as Section 179.
What is Section 179?
Section 179 is the government’s way of encouraging businesses to purchase new equipment while, at the same time, investing in themselves.
This benefit, found in the IRS tax code, allows businesses to deduct the entire purchase of qualifying equipment and software bought or financed throughout the current tax year. For example, you can deduct the full price of a new computer you purchased for your small business. The deduction comes from your gross income.
While large businesses can take advantage of Section 179, it is created for the millions of small businesses purchasing or financing equipment for less than $2,500,000.
Before 2018, Congress would have to renew this tax benefit annually. But today, Section 179 benefits are permanent.
How Does it Work?
The Section 179 benefit is calculated on an item-by-item basis. If you decide to claim this benefit, you will have a relatively easy time completing the necessary paperwork. You’ll want to download IRS form 4562 and fill it out accordingly.
As of 2022, the deduction limit is $1,000,000 on new and used equipment, while the spending cap is $2,500,000. This equipment must be purchased and put into service by the end of the tax year.
Remember, you don’t always have to use the benefit on every piece of equipment you buy throughout the year.
What Equipment is Eligible?
A significant aspect of Section 179 centers around the amount of equipment that qualifies under the Section’s purchases. According to the IRS, the purchased property must meet one of the following requirements:
- Tangible personal property
- Other tangible properties used for important processes or related facilities
- Single-purpose livestock or horticultural structures
- Storage facilities that are used for petroleum distribution
- Off-the-shelf computer software
- Qualified real property
The IRS also stated tangible personal property encompasses machinery and equipment, storage tanks, and livestock, such as horses. Computer software must be purchased by the general public, not heavily modified, and subject to a nonexclusive license.
You can even use Section 179 for vehicles. Certain limits exist on passenger cars and trucks to avoid potential abuse. However, full deductions exist for vehicles with specific duties, such as an airport shuttle van. See latest IRS Form 2106 to find the various qualifications.
Talk with your accountant or financial advisor to take full advantage of Section 179 tax benefits. The money you could save would allow you to expand operations and invest in your employees, which will go a long way.
Plan for purchases accordingly. You don’t want to wait until the end of the year to claim these benefits.
Post updated. Originally published March 2016.