The Section 179 deduction can be one of the juiciest tax breaks for small businesses. With this regulation, your company may be able to fully deduct up to $1 million a year when buying new assets like equipment, furniture and vehicles. Plus, you get the entire deduction immediately rather than spreading it out over the useful life of an asset. When it’s time to file taxes, you’ll need to follow IRS Form 4562 instructions to claim your deduction. The form is broken up into six parts and can be technical, but don’t let this scare you away from claiming your deserved tax break. We’re here to walk you through the most important sections. We encourage you to review the IRS form and our Section 179 explainer before diving in.
Part 1: Section 179 Deduction
Determining Eligibility
The first part of IRS Form 4562 deals with the Section 179 deduction. In lines 1-5, you’ll calculate whether you’re eligible for the deduction or if you spent too much. Here’s what each line should look like as outlined in the IRS Form 4562 instructions, along with a few examples.
- Line 1 = $1 million, the maximum possible Section 179 deduction. This amount doesn’t change and is set by the IRS regulations.
- Line 2 = How much your business spent on assets eligible for the deduction. This number changes based on your business spending for the year and will be different for each taxpayer.
- Line 3 = $2.5 million. This is the cutoff for eligible purchases under the Section 179 deduction. If you spend more than this in a year, your deduction starts to decrease. The number you put in this line is set by the IRS and won’t change between taxpayers.
- Line 4 = Your total business spending minus the cutoff limit, so line 2 minus line 3. If less than 0, just enter 0.
- Line 5 = Your potential Section 179 deduction, so line 1 minus line 4. If less than 0, just enter 0.
Let’s see how this works in action. Let’s say the owner of a construction company bought $500,000 in assets that would qualify for the Section 179 deduction. Based on that amount, they should easily receive the deduction.
- Line 1 = $1 million
- Line 2 = $500,000
- Line 3 = $2.5 million
- Line 4 = $500,000 – $2.5 million = negative $2 million. Since less than 0, enter 0.
- Line 5 = $1 million – 0 = $1 million
From the above calculation, we can see the construction business owner is eligible for the full $1 million deduction. What if they had spent $3 million on assets instead?
- Line 1 = $1 million
- Line 2 = $3 million
- Line 3 = $2.5 million
- Line 4 = $3 million – $2.5 million = $500,000
- Line 5 = $1 million – $500,000 = $500,000
In this case, their highest possible Section 179 deduction is just $500,000 because they went over the spending threshold. If line 5 is zero or less than zero, your business is not eligible to claim the 179 deduction this year.
Listing Eligible Purchases
If your business is eligible for the Section 179 deduction, you’ll proceed to line 6 to name your assets. Under column A, you’ll list each asset that qualifies for the Section 179 deduction, and you’ll include the cost under column B.
You’ll also need to decide whether to use your Section 179 deduction today or delay it for the future. If you don’t want to claim the entire expense as a deduction this year, put in the elected cost under column C. That’s the amount you do want to claim upfront. If you bought a truck for $100,000 and only want to claim half upfront for the Section 179 deduction, enter in $50,000 under elected cost. You may want to do this because your income taxes are relatively low this year and you’d rather save some of the deduction from your purchase for the future, when you think you’ll be in a higher tax bracket.
In line 7, you’ll add any listed property, which are assets that you split between personal and business use. You’ll calculate this amount later in Part 5. By adding the figures from line 6 and line 7, you’ll see your potential Section 179 deduction, but there’s still more to consider.
Carrying Over Excess Deductions
Your Section 179 deduction cannot be more than your total business income for the year. If your eligible deduction is greater than your income, whatever goes over the limit can be carried over to next year’s tax return. You’ll work through this calculation in the final steps of Part 1. If your potential deduction is $200,000 but your income was $150,000, you’ll carry the extra $50,000 to the future.
On the other hand, if you were carrying over an unused deduction from previous years, you can add it back here to claim it against this year’s income. By completing all of Part 1, you’ll find your Section 179 deduction for this year as well as the unused amount you can keep for future returns.
The rest of the IRS Form 4562 instructions deals with other parts of depreciation not connected to the Section 179 deduction. We’ll give them a quick overview.
Part 2: Special Depreciation
Part 2 and Part 3 determine your depreciation tax break when you don’t use the Section 179 deduction. This could be because you chose not to use the Section 179 deduction or because some or all of your investment was not eligible. This system is also known as the Modified Accelerated Cost Recovery System or MACRS.
Part 2 specifically calculates the Special Depreciation Allowance, where you can claim a larger deduction in the first year for certain assets under the MACRS schedule, according to the IRS.
Part 3: MACRS Depreciation
This section covers the normal depreciation calculations under MACRS, where you list assets along with their expected life to determine each year’s deduction. If you bought a vehicle that should last five years, you will spread the expense deduction over five years.
Part 4: Depreciation Summary
Here you add up your total depreciation deduction for all three systems: Section 179, Special and MACRS.
Part 5: Listed Property
In Part 5, you determine how much of a deduction you can claim for assets split between personal and business use, like a company car. By going through these calculations, you can find what percentage of the expense counts as a business deduction.
Part 6: Amortization
The final section covers amortization, which is like depreciation but for intangible assets, like the loss in value over time for a company patent or trademark. These expenses are also eligible for a deduction.
Extra Guidance
If you need additional help filling out Form 4562, the IRS published a line-by-line guide explaining every step in detail, including definitions for many of the terms you’ll find in the form.
Another option is to run your Section 179 calculation through your tax software. The program will ask you for the same kind of information as Form 4562 but will handle the calculations for you. Or if you have a tax adviser, you can lean on them to handle the form for you.
Even if you outsource the actual tax work, it still helps to understand what’s going on behind the scenes with Form 4562 and how it determines your deduction. That way, you can better predict what your Section 179 deduction will look like and plan your business investments to make sure you’ll qualify for the full amount.
