The Section 179 deduction is one of the biggest deductions available to businesses. It is often referred to as the “SUV tax loophole” or “Hummer deduction”, for its ability to get a bigger deduction for these types of vehicles. The “179 deduction”, as it is commonly called, refers to Section 179 of the IRS tax code. This deduction offers business owners the ability to deduct up to $500,000 of qualifying purchases. The deduction was initially started by Congress to encourage businesses to develop by allowing a deduction for newly purchased equipment.
Think of the 179 deduction as accelerated depreciation. Instead of waiting, 5, 7, 15 or more years to slowly deduct your equipment, material or improvement costs, you can elect to depreciate most, or all, of it in the current year. This is especially good for businesses that are starting up, as high business costs can hinder your future growth.
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Many items qualify for these deductions, including vehicles, storage facilities and some types of structures, machinery, equipment, and livestock. In the 2013 tax year, computer software bought off the shelf may also be deducted. The IRS calls such property “tangible” property, meaning that it is actual property that exists in a material form.
One of the main requirements is that all the property must be used in business, at least 50% of the time, and be purchased in the current tax year. If you are doing 2013 taxes, the equipment must be purchased and paid for during that year.
Vehicles are also eligible for a substantial deduction. However, if you use your car, for personal reasons also, you may deduct only the business percentage, which is usually based on mileage. For example, if you drove 20,000 miles, and 10,000 were for business purposes, you could deduct 50% of the cost. So if you paid $50,000 for the car, you can deduct half of that up to the maximum limit. This limit is $25,000 for sport utility vehicles (SUVs), and $11,160 (2012 amount) for passenger cars up to 6000 pounds.
If you use your computer for personal and business use, the usage is based on hours. You would calculate the percentage of hours you use it for work-related purposes, and divide by the amount of time you use it for personal reasons. For example, if you use your computer 8 hours for work, and 4 hours for personal use, your percentage would be 50%. Remember, the business use is over 50%, not just 50%.
Reasons to take the 179 Deduction
There are definitely good reasons to take this deduction. Remember, this deduction is optional, and you may instead choose to use standard depreciation. In a year when business expenditures are high, the immediate, large tax savings can help with cash flow, lower costs, and help your business expand.
Because you deduct the entire amount of your purchase in the year you acquired it, you cannot keep depreciating the items in subsequent years. A business should carefully consider the future deductions, expected cash flow, and whether this deduction would be beneficial. Keep in mind that if you retire goods from service, sell the equipment, or your business use drops to 50% or lower during the year, you must “recapture”, or pay back a certain amount of the deduction.
Section 179 Deduction Limits
The Section 179 deduction for 2013 limit is $500,000. Real property is limited to $250,000 of that limit. Although you can deduct up to $500,000 that does not mean you can simply block off the purchase price of an item. Most real property, (a tax term for real estate minus the land value), does not qualify. However behind every simple IRS rule, there is a more complicated one, and there are exceptions for improvements made to leasehold, restaurant or retail property up to $250,000.
Additionally, you can deduct part or all of the cost of equipment. If you bought a saw for $10,000, you can deduct the full amount or part. If you used $5,000 as a 179 deduction, the remaining $5,000 could be depreciated. The dollar limit is subject to limits under the following circumstances:
- Any 179 property amount over $2,000,000 is subject to a reduction, which is reduced dollar for dollar.
- Qualified Business Enterprise Zones qualify for an increase of $35,000. If costs exceed $2,000,000 the increase is half the qualified zone property cost.
- Sport Utility Vehicles have a limit of $25,000 unless they seat more than nine passengers behind the driver’s seat, are equipped with a cargo area, or have an enclosure separating the driver from the cargo area and have no body section protruding more than 30 inches ahead of the leading edge of the windshield.
- Disaster Assistance property is increased by the smaller of $100,000 or the cost of the qualified section 179 Disaster Assistance property placed in service during the tax year. However, if the total amount of property exceeds $2,000,000 the total is increased by the smaller of $600,000 or the cost of the property.
- Filing status also has an effect on limits. Married Filing Jointly taxpayers are treated as one taxpayer in determining any reduction to the dollar limit, regardless of who purchased the property. When using Married Filing Separately, both spouses are treated individually in determining the dollar limit. If the percentage does not total 100%, the amount is split equally between both spouses.
Clearly, the Section 179 deduction is beneficial for many small businesses, and can impact many purchases and decisions. As of this writing, there is a push in the Senate and House to make the Section 179 permanent at $250,000. Many feel that this would bring some stability to the up and down world of tax deductions, and allow business owners to solidly and confidentially make future plans.
See IRS Publication 946 for more information.
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