Here’s what you need to know!
For many businesses, the best way to save on taxes is by investing in equipment that will put money right back into your pocket. Section 179 provides a tax deduction for this type of spending, so it’s worth taking advantage if you’re eligible.
Section 179 Tax Deduction Overview
The Section 179 Deduction is a powerful tool for businesses of all sizes. It allows you to deduct all or part of the cost of equipment purchased or financed (and put into place) before December 31, 2022. The only stipulation is that the equipment must meet all criteria for this deduction.
The term “equipment” in tax law is very broad. It’s defined by tangible property, what you can see and touch, with a useful life of more than a year. Cost doesn’t matter; it can be inexpensive or pricey. Equipment includes smartphones, copiers, hand tools, appliances, and office furniture. It also includes sophisticated machinery, such as 3D printers, robotics, and devices for medical offices. It also includes vehicles used in business, including cars, trucks, and vans.
It’s important for your company’s growth and success that you become familiar with this tax incentive. It can really help to plan for your business’s future regarding capital equipment purchases.
Via the Tax Cuts and Jobs Act, the current deduction limit is $1,000,000 on qualifying equipment, and the limit on equipment purchases has increased to $2.5 million.
The new legislation will allow businesses to deduct 100% of the cost for equipment purchased or financed between September 27th, 2017 and 2022. Additionally, depreciation now also applies to used equipment.
Section 179 Eligible Equipment Depreciation
The Section 179 deduction, also called first-year expensing, is a write-off for purchases in the year you buy and place the equipment in service. There’s an annual dollar limit on what you can deduct, you have to be profitable to use the deduction, and it has to be elected.
Bonus depreciation, also called the special depreciation allowance, is another first-year write-off. There’s no dollar limit, and through 2022, it’s 100% of your cost. The deduction applies automatically, but you can elect not to use it (and instead “save” depreciation allowances for future years).
Regular depreciation is an annual allowance that spreads deductions for the cost of equipment over a number of years fixed by law for the particular type of item.
Section 179 Exceptions
Because the tax code can never be completely simple, some exceptions apply.
Assets must have a useful life of over one year. If an asset is used for anything other than business, only the percentage of business use can be written off. The amount deducted from your tax bill as a result of your deduction cannot exceed the business’ income for that year and if your business does not start using the equipment the same year it is purchased or leased, the deduction is lost.
Claiming the Section 179 Tax Deduction
Section 179 allows businesses to write-off the full purchase price of any qualifying piece of equipment in the year it was purchased or financed.
This deduction must be selected, it is not automatic. To claim the deduction, you’ll need to fill out Part 1 of IRS form 4562 and make sure the completed form is attached to your tax return.
Not all types of equipment qualify so it’s best to consult a tax professional before making any purchases.
The opinions in this material are for general information only and should be used strictly as a guide. This information is not intended as a substitute for consultation with an experienced professional regarding your individual situation.