The Section 179 tax deduction offers small business owners with an exciting opportunity to save substantially on their tax bill. Here’s how it works: When you purchase new or preowned equipment, you’re allowed to deduct the entire cost from your tax bill that year, up to $1,000,000. Companies that purchase equipment costing in excess of $2,500,000 receive a reduced deduction, but few companies will make that amount in purchases within a single year. The Tax Cuts and Jobs Act of 2017 doubled the deductible amount while also raising the threshold to receive a reduced deduction, meaning there has never been a better time to take advantage of Section 179. However, you must purchase equipment before the end of the calendar year to write it off on your next tax bill, so it’s important to act fast. Learn what kinds of equipment count as Section 179 qualifying property and how to purchase that equipment as quickly as possible.
What You Can Deduct
In general, anything you would commonly consider business equipment, machinery, or property can be deducted. Exceptions do exist, though – and if you purchase property with the intention of deducting it only to find out you can’t, it could negatively impact your bottom line. Before you buy anything, familiarize yourself with the eligibility requirements for the tax credit:
- New or used equipment purchased for business purposes, including machinery
- Tangible personal property used at the business; examples include tools, signs, and office supplies – all the “stuff” you need to run your business (with the exception of inventory you sell)
- Vehicles with a gross weight above 6,000 pounds are fully deductible as long as they’re solely being used for business, such as with a tractor-trailer or a shuttle bus. For passenger vehicles, vans, and trucks that could potentially be business and personal vehicles, the deduction is limited to $11,160 for cars and $11,560 for trucks and vans
- Office furniture like desks and chairs, as well as office equipment like copy machines and computers; computer software purchased off-the-shelf is also eligible
- Non-structural property attached to your place of business such as a printing press or an especially large piece of equipment
- Property used for business and personal use; deductions are calculated based on the percentage of time the property is used by the business.
- Improvements made to non-residential buildings, such as adding an alarm, fire-suppression system, or new roof
What You Can’t Deduct
Lawmakers created Section 179 in order to spur small-business growth and incentivize economic activity. However, not all types of business purchases accomplish those objectives. In those instances, it is possible to make a purchase that will not be considered Section 179 qualifying property. Here are some examples:
- Real property, which is defined as land, buildings, and permanent structures
- Property used outside of the United States, though exceptions do apply
- Property used to furnish a place of lodging
- Property that is inherited or acquired as a gift, as well as property purchased from related parties (like a family member or business associate)
What You Can Finance
For most business owners, the majority of what you purchase is eligible for Section 179. Since equipment must be purchased in the same year it’s deducted from the tax bill, it’s important to purchase equipment within a specific time frame, which can be difficult without having substantial amounts of cash on hand. Fortunately, the IRS treats all Section 179 qualifying equipment equally regardless of whether it’s paid-in-full, leased, or financed. You can deduct the same kinds of property in the same amounts whether you own it outright or plan to pay it off in installments.
Business owners eager to take advantage of this tax deduction should take several steps. First, determine what kinds of equipment you need to meet your short and long-term business goals. Given how much you can save with the tax deduction, equipment that may have seemed too expensive may actually be quite affordable. Next, explore Section 179 qualified financing options that provide the funds you need to purchase property before the end of the year. Some funding sources require a lengthy application process followed by a long period of underwriting. Even if you’re approved for financing, you may not receive funds quickly enough to use them to your advantage. Also, keep in mind that purchasing major business equipment or performing upgrades on your property won’t happen overnight. It may take weeks to complete these processes, further shrinking the window you have to leverage Section 179 this year.
Time is of the essence, and opportunities available now may not exist in 12 months (or even 6). Focus on identifying financing options that expedite how quickly applications are approved and funds are released. Once you have the money you need to purchase everything your business requires, Section 179 becomes a true asset.
Disclaimer: National Funding is not a tax expert – always consult your tax professional to determine tax implications and benefits for your business.