Updated on November 20, 2023.
Section 179 is a tax deduction for business-related equipment expenses, allowing business owners to deduct the entire cost of large expenses such as equipment, office furniture and machinery. This offers significant tax relief for small- and medium-sized business owners and so staying up-to-date on its latest rules is important for any business owner. Here’s an overview on Section 179 with its most recent updates for the 2022 tax season.
What is the Section 179 Tax Deduction?
Normally, when you buy business equipment, you’re not allowed to deduct the entire purchase within a single tax filing year. Instead, you need to spread the deduction over the expected life of the asset (as determined by the IRS), a system known as depreciation.*
For example, the IRS classifies tractors as three-year property, so if you bought one for $60,000, you could only deduct $20,000 per year for three years under this system.
However, with the Section 179 equipment deduction, you’re able to deduct the full purchase price of that tractor from your taxes within one tax year. The Official Website of Section 179 reads: “Section 179 is simple. You buy, finance, or lease qualifying equipment, vehicles, and/or software, and then take a full tax deduction on for this year.”
Which Purchases Are Eligible?
Not all business purchases qualify for the 179 tax deduction. This tax break only applies to physical items — intangible assets like patents and copyrights don’t count. You also cannot use the Section 179 deduction for buying land and real estate.
Besides these restrictions, most other business equipment and asset purchases would apply. Some common examples include:
- Machinery, tools and equipment
- Office furniture
- Computers, software, printers and other computer equipment
- Improvements to business buildings as well as installing fire alarms, roofing and security systems
The IRS has additional rules for equipment you could use personally as well as for your business such as laptops and cellphones. To claim the 179 deduction for these items, at least 50% of their usage must be for business.
They also limit the size of the potential deduction for cars and trucks. You can only claim $11,160 upfront and save the rest of the deduction for another year. For other vehicles (that aren’t used for personal needs) like cargo vans, tractor-trailers and heavy construction equipment, you can claim 100% of the purchase price under the 179 deduction.
What About Leased Equipment?
You can also use the Section 179 equipment deduction if you finance your investment through a lease. This allowance, however, depends on what type of lease you use: capital or operating.
- Capital lease: With these lease agreements, you agree to buy the asset at or by the end of the contract — basically a rent-to-own deal. With capital leases, you can take the 179 deduction for the cost of the asset when you sign the contract. This is a great way to turbocharge your tax breaks because you can immediately deduct the full cost of the asset while only paying for part of it. For example, you can lease a $90,000 bulldozer with a three-year agreement, committing to three installments of $30,000, but deduct the $90,000 right away.
- Operating lease: In an operating lease, you’re only renting the equipment with the plan to give it back at the end of the contract. You can’t use the Section 179 deduction for these leases and can only deduct your monthly payments, so they’re less tax effective.
How Has the Section 179 Deduction Changed in 2023?
There weren’t too many changes from 2022 to 2023 — which is good news. Here’s a quick rundown.
- Businesses can take a total deduction of $1,160,000, which is $80,000 higher than in 2022.
- Businesses’ total equipment purchase limit is $2.89 million (increased from $2.7 million in 2022).
- Businesses can apply 80% bonus depreciation on both new and used equipment for the entirety of 2023.
As long as your spending is at or below that limit of $2.89 million, your purchases will qualify. But the deduction begins to phase out dollar-for-dollar after that limit is met and will discontinue at the $3.67 million mark.
So, be mindful of that $2.89 million ceiling. If you’re getting close to it, consider postponing any additional purchases until 2024 so you don’t lose your eligibility.
How Does Bonus Depreciation Factor In?
Bonus depreciation is another way to deduct your business purchases. It’s similar to the Section 179 deduction in that it lets you take an upfront tax break for the cost of buying assets without spreading it out over time. Previously, it only covered new equipment, but in recent years, the law has changed to allow used equipment. With bonus depreciation in 2023, you can claim 80% of the purchase cost.
The 80% deduction applies to purchases made through December 31, 2023. After that, it will start to decrease each year until it hits 0% in 2027. So, if you have any major equipment purchases and want to capitalize on bonus depreciation, consider acting sooner rather than later.
What Comes Next?
The Official Website of Section 179 proudly says, “Using Section 179 might be the most profitable decision you make this year.” A rather compelling statement.
Including Section 179, there are quite a few breaks and federal supports this tax season, so take time to familiarize yourself with all the options. You might also consider contacting a small business tax professional as they’ll be up to date on these ever-evolving laws.
After a tough year for most small- and medium-sized businesses, owners would likely welcome the Section 179 deduction, bringing them an easy (and most profitable) win.
You can also visit the National Funding blog for more articles on tax advice and additional information on possible deductions.
*Some deductions listed may not be available to your small business. Consult with your tax advisor before claiming a deduction on your tax return.