If you’re on the fence about whether your business can afford a new piece of equipment, the IRS just might be your savior (did you ever imagine yourself thinking that?). Under the Section 179 tax deduction, business owners get a large, upfront tax break when they buy new assets. What qualifies for Section 179 depreciation and is it the right move for your small business? Here’s what you need to know.
What Qualifies for Section 179 Depreciation?
When you buy a new asset for your business, like machinery, furniture or vehicles, you normally aren’t allowed to deduct the entire purchase all at once. Instead, you’re supposed to split the cost over the expected lifespan of the asset, known as its depreciation schedule. For example, the IRS expects a computer to last five years so you can only deduct 20 percent of the purchase price each year (1/5 per year).
But with the 179 depreciation deduction, you can deduct the entire purchase price in the first year, according to the IRS. This applies to equipment, tools, cars, machines, and technology purchased for your business. If you finance the equipment with a loan, you still get the deduction for the full purchase price and can also deduct the borrowing costs. In 2023, you can deduct up to 80% of the purchase price.
The new 2023 changes expanded the size of this break so now your small business could deduct up to $1.16 million of purchases per year.
Should I Take the Section 179 Deduction?
If you plan on buying something that is eligible for the 179 deduction, it usually makes sense to just take it. You get the largest possible deduction today rather than spreading it out over years. This way you free up as much extra cash as you can now to reinvest in your business.
For example, let’s say your business tax rate is 35 percent and you buy $200,000 of equipment. By using 179 depreciation, you can deduct up to 80% of the purchase price and save $56,000 in taxes ($160,000 x 35 percent). Without the 179 deduction, you would need to spread the tax break over at least five years (depending on what you bought), meaning you would only save at most $14,000 in taxes this year.
Using the 179 deduction also makes planning your taxes easier because you won’t have to keep track of an asset’s depreciation schedule year after year. Instead, you can write-off the entire purchase at once, which simplifies your record keeping. In most cases, the answer to “Should I take the Section 179 deduction?” is yes.
When Shouldn’t I Use the Deduction?
If your current business tax rate is low and you expect to owe more in the future, you may want to skip taking the 179 deduction and instead use the regular depreciation schedule, when you spread the deduction over years. That way you can delay the deduction for buying the equipment later when it will save you more in taxes.
Also, this deduction starts to phase out when you buy $2,890,000 of assets in a year and is completely gone after you buy $3,500,000. The government set this limit so the 179 deduction would only be available for small businesses.
How Should This Impact My Decision to Borrow Money?
Keep the 179 deduction in mind as you crunch the numbers behind financing a new equipment purchase. Your tax savings from the 179 deduction could put a serious dent and perhaps cancel out the first-year borrowing costs of a new equipment loan.
Remember, the cost of not expanding your business can be the most expensive move at all: the cost of doing nothing. By taking advantage of all available tax breaks, like the 179 deduction, you can expand as quickly as possible. If you work with a lender experienced with this deduction, they can make sure you qualify for your full tax break as you set up your equipment financing.
The government created the 179 deduction to make it easier for businesses to expand and grow. So why not take advantage? Your business will get new equipment and your upcoming tax return gets a sizable break. Hard to beat that combo.
Updated December 4, 2023