Definition
Section 179 of the Internal Revenue Code of 1986 (IRC) allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. Instead of depreciating these capital improvements over time, businesses can take the expense as a deduction in the year the purchase is made. This can significantly reduce taxable income for the year the asset is placed in service.
For tax years beginning in 2012, small business taxpayers could write off up to $125,000 (indexed for inflation) of capital expenditures, subject to a phase-out threshold that starts once capital expenditures exceed $500,000 (indexed for inflation). For tax years beginning after 2012, the maximum expensing amount drops to $25,000 while the phase-out threshold drops to $200,000, unless further legislative changes are enacted.
Examples
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Small Business Acquisition of Machinery: ABC Manufacturing buys $100,000 worth of machinery in 2023. Under Section 179, the company can deduct the entire $100,000 from its gross income, provided it has not exceeded the phase-out limit.
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Software Purchase: A tech startup purchases software for $50,000. If this software qualifies under Section 179, the startup can deduct the full amount on its tax return for that year, rather than depreciating it over multiple years.
Frequently Asked Questions (FAQs)
What qualifies as Section 179 property?
Qualified property includes tangible personal property (e.g., machinery, equipment), off-the-shelf software, and certain improvements to non-residential real property such as roofs, heating, ventilation, air-conditioning, fire protection, alarm systems, and security systems.
How does the phase-out limit work?
The deduction limit is reduced dollar-for-dollar by the amount qualifying property placed in service exceeds the phase-out threshold. For example, if the phase-out limit is $500,000 and a business places $600,000 of qualifying property into service, the Section 179 deduction would be reduced by $100,000.
Can Section 179 deductions be used with Bonus Depreciation?
Yes, businesses can use both Section 179 and Bonus Depreciation. Section 179 is generally applied first, and then Bonus Depreciation can be applied to the remaining amount of the asset’s cost.
Are leased property purchases eligible for Section 179?
Leased property typically does not qualify under Section 179 because the property needs to be owned, not leased.
Can a business carry forward a Section 179 deduction?
If a business’s Section 179 deduction is larger than its taxable income limit in a year, the unused amount can typically be carried forward to the next tax year.
Related Terms
- Depreciation: The process of allocating the cost of tangible assets over its useful life.
- Bonus Depreciation: A deduction that allows a business to immediately deduct a sizable percentage of the purchase price of eligible business assets.
- Capital Expenditures: Funds used by a business to acquire, upgrade, and maintain physical assets like property, buildings, or equipment.
Online Resources
Suggested Books for Further Studies
- “Tax Deductions for Businesses” by Janet Y. Neste - Provides in-depth information about various business tax deductions including Section 179.
- “IRS Tax Secrets for Small Business” by Sandy Botkin - A comprehensive guide to small business tax deductions.
- “Guide to Depreciation” by Dan Niemann - Covers all aspects of depreciation and related deductions including Section 179.
Fundamentals of Section 179: Taxation Basics Quiz
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