Section 179 lets you treat up to $500,000 in equipment as a business expense on your tax return in the year of purchase instead of depreciating the equipment and deducting its cost over several years. Our Section 179 calculator will help you determine how much you can deduct on your tax return.
Section 179 Calculator: How Much Can I Save?
- Value of Equipment: This should be the amount that you paid for the equipment.
- Estimated Lifetime: This is the amount of time the equipment is expected to remain in working condition.
- Marginal Tax Rate: In general, this is the tax bracket that you fall into.
How the Section 179 Calculator Works
In order to use our Section 179 calculator, you’ll first need to input the cost of the equipment, the estimated life of the equipment, and your marginal tax rate. These are the three variables that determine how much you’ll save by electing the 179 deduction versus standard depreciation methods. If you’re unsure of your tax rate, use last year’s tax bill as a guide, ask your accountant for help, or click here to see your marginal tax rate.
The calculator has two outputs:
1. Estimated Tax Savings in Year 1
This is the amount of money you will save by electing Section 179 instead of standard straight line depreciation (there are also other depreciation methods such as MACRS depreciation). This number takes into account the fact that you will have some tax savings (1 year’s worth of depreciation) even if you choose ordinary straight line depreciation instead of the 179 deduction. Most section 179 calculators do not take this into account, which is why the number you see here may be different from what other calculators show.
2. Lifetime Benefit
There is an additional benefit to electing Section 179 beyond the first year tax savings. Since you are getting your tax savings upfront instead of over the life of the equipment, you have additional money to use for your business that you would not have had if you used standard depreciation methods. To calculate the lifetime benefit, we assume that you would have had to borrow the money that the 179 deduction allows you to keep in your pocket, and pay a 12% interest rate on the funds. Other calculators do not tell you the lifetime benefit of electing Section 179.
Section 179 Example
Let’s say you buy restaurant equipment that has a 10-year life for $50,000. Normally, you might deduct $5,000 of the equipment’s value every year for 10 years. If your business had a 35 % marginal tax rate, this would reduce your tax bill by $1,750 every year for 10 years, for a total savings of $17,500.
If you use Section 179, you will get the year one savings of $1,750, but you will also save an additional $15,750. Over the 10-year life of the equipment, you would also get lifetime benefits of $9,450 that you could put to work in your business.
What Equipment Qualifies for Section 179?
The good news is that most equipment that you purchase or lease for your business will qualify for the Section 179 deduction.
To make use of the deduction on your 2017 taxes, you must acquire the equipment and begin using it in your business between January 1, 2017 and December 31, 2017. It’s not enough to just purchase the equipment during those dates–you must also put it to use in your business during this time.
Examples of what’s eligible for Section 179 include the following:
- Business appliances (ovens, baking equipment, etc.)
- Office equipment (computers, fax machines, phones, etc.)
- Office furniture (desks, chairs, etc.)
- Business vehicles with a gross vehicle weight in excess of 6,000 lbs. (See the complete list of vehicles eligible for sec 179)
- Software that’s not custom designed
- Manufacturing equipment and tools
Equipment that is purchased for both business and personal use qualifies for Section 179, but your deduction will be based on the percentage of time that you use the equipment for business purposes.
Leased equipment is eligible for Section 179 but only if your lease is structured as a capital lease (e.g. a buyout lease). Fair market value leases are not eligible for Section 179, though you can deduct your monthly lease payments as a general business expense. Read more about different types of leases in our ultimate guide to equipment leasing.
How to Elect the Section 179 Deduction
Section 179 savings are not automatic; you have to elect to use Section 179 by submitting IRS Form 4562 with your tax return. If you do your own taxes, we recommend TurboTax because it will walk you through the steps to complete the tax form for the sec 179 deduction.
Below is a snapshot of the section of Form 4562 that must be completed to elect the sec 179 deduction:
Also, be sure to keep records of the business equipment you bought or leased during the year, including where you acquired the equipment from and the date the equipment was acquired and put into service. QuickBooks allows you to easily keep track of equipment purchases throughout the year.
In case the IRS audits you, you will need accurate records to prove that you were eligible to take the Section 179 deduction.
Other Section 179 Provisions
Our Section 179 calculator is designed for small businesses that spend less than $500,000 on equipment. If your business spends more than that, these other provisions may be pertinent to you.
Bonus Deduction for Equipment Acquisitions Over $500K
Businesses can get an additional 50% bonus deduction for purchases of equipment above $500K. This provision is of use primarily to larger businesses that purchase a lot of equipment (unlike Section 179, bonus depreciation does not apply to leased equipment).
For example, if a business spends $700,000 on equipment, it will first elect the $500,000 Section 179 deduction. In addition, it can deduct 50 % of the remaining $200,000, which equals $100,000. Ultimately, the business will be able to deduct $600,000 on the $700,000 purchase.
The bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.
$2 Million Spending Limit
Under the Protecting Americans from Tax Hikes (PATH) Act of 2015, businesses can spend up to $2 million on equipment before the Section 179 deduction is reduced. In other words, if you spent $2 million on equipment, you can deduct $500,000 using Section 179. But if you spent $2.1 million on equipment, you will only be able to deduct $400,000. If you spend $2.5 million or more on equipment, you cannot deduct anything under Section 179.
Section 179 is a simple way for small businesses to save money on their taxes. Businesses of all types need equipment, so chances are, you’ll be able to use Section 179 to claim a tax deduction. Use our Section 179 calculator to estimate how much money you can save. If you have questions about equipment financing, read our Ultimate Guide to Equipment Leasing.