The Section 179 deduction allows business owners to immediately deduct up to $1,020,000 of the cost of qualifying property and equipment purchases for the 2019 tax year. The advantage of the deduction is you immediately receive the tax savings from an equipment purchase rather than gradually saving taxes through depreciation in future years.
What Is the Section 179 Deduction?
The Section 179 deduction is an election to immediately deduct the purchase of assets instead of deducting the cost of assets over multiple years through depreciation. Depreciation allocates the cost of an asset over a number of years that roughly corresponds to the useful life of the asset.
For example, under normal depreciation rules, the cost of a computer will be deducted over five years. The advantage of the deduction is that the cost of the computer can be immediately deducted. Most business owners would prefer to have a tax deduction now versus five years from now.
What Is Section 179 Property?
Section 179 property refers to property eligible to be immediately deducted with the Section 179 deduction. Section 179 property includes the following property placed in service during the year and used in a trade or business:
- New and used machinery, furniture, and equipment
- New and used vehicles (subject to some special limitations)
- Certain nonresidential real property improvements, including roofs, HVAC, fire protection and alarm systems, and security systems
- Off-the-shelf computer software
Section 179 property does not include:
- Property purchased, but not placed in service during the year
- Furniture and equipment used in a rental activity, unless the rental activity rises to the level of a trade or business (gray area in the tax law; consult a tax professional)
- Property held for investment
- Residential real property and improvements
- Nonresidential real property, except certain improvements listed above
- Property received as a gift or inheritance
While vehicles are qualified Section 179 property, they are subject to special limitations.
Vehicles as Section 179 Property
You can claim the Section 179 deduction for vehicles that you have purchased during the year. If the vehicle is used for both personal and business reasons, it must be used more than 50% of the time for the business to qualify for the deduction.
The law requires written evidence of the business miles in order to claim any deduction for a vehicle. A simple way to track the number of miles you drive is with QuickBooks Online, our top-rated accounting software for small businesses. You can track your mileage in the QuickBooks Online mobile app using your phone’s GPS. The mileage then automatically transfers to your QuickBooks Online account. Sign up for a free trial with QuickBooks Online today.
The maximum Section 179 deduction for a vehicle is:
Section 179 Vehicles Deduction Limits for 2019
Type of Vehicle | Section 179 Limitation |
|---|---|
Cars | $10,100 |
Passenger Trucks and Vans (up to 6,000 lbs) | $10,100 |
SUVs, Passenger Trucks, and Vans (over 6,000 lbs) | $25,500 |
Vehicles Modified for Nonpersonal Use (Including Ambulances, Hearses, Delivery Vans, and Tow Trucks, Among Others) | No limit |
The Section 179 limitation must be reduced for vehicles that are not used 100% for business. For instance, if a car is used 90% for business, then the maximum deduction is $9,090 ($10,100 x 90%). If the vehicle cost is more than the maximum deduction, the remaining cost of the car is depreciated under the normal rules.
How the Section 179 Deduction Works
The maximum Section 179 deduction of $1,020,000 for 2019 is reduced dollar for dollar by the amount of Section 179 property purchased during the year that exceeds $2,550,000. Any Section 179 deduction claimed reduces the cost of the asset that can be depreciated over future years.
For example, if you purchase $3 million of Section 179 property, your maximum deduction will be reduced by $450,000 ($3 million – $2,550,000). So, of your $3 million in purchases, you can deduct $570,000 ($1,020,000 – $450,000) immediately under Section 179. The remaining $2,430,000 ($3 million – $570,000) must be depreciated over future years.
How to Elect the Section 179 Deduction
Section 179 is elected by completing Part 1 of the Form 4562. This form summarizes your depreciation expense and is included with your business return.
Who the Section 179 Deduction Is Right For
Think of the Section 179 deduction as accelerated depreciation. Instead of waiting five, seven, or more years to deduct vehicles, computers, or expensive equipment, you can elect to deduct the entire cost in the year of purchase. This makes the deduction right for just about any business looking to maximize their current-year tax savings.
However, there are a couple of scenarios where it might not be wise to claim a Section 179 deduction.
Avoid Section 179 When Your Tax Rate Is Low
The tax savings from a deduction is measured as the deduction times the marginal tax rate. So, if your tax rate is 10% and you deduct $10,000, you have saved $1,000 in taxes. Remember that Section 179 accelerates deductions from future years into the current year. If your current-year tax rate is less than your future-year tax rate, then your tax savings in the current year is less than your tax savings in the future years.
Be Careful Claiming Section 179 on Financed Property
While it is perfectly legal to claim a Section 179 deduction for property that is financed by a bank, in my experience, doing so can create cash flow problems in the future. Here is what I’ve seen happen to many small businesses with tight cash flow:
You need a piece of equipment that sells for $100,000. You can’t afford to pay cash, but you can afford $20,000 per year for five years (ignore interest), so you finance the purchase over five years. You claim a Section 179 deduction and are thrilled in the first year to reap a $100,000 deduction when you’ve only spent $20,000 in cash! But, things get ugly in the next year. You will pay $20,000 toward the debt, but not get any deduction for the cash payments. You’ve already claimed the deduction in the first year.
By not being able to deduct the cash payment, your taxable income increases by $20,000. Where are you going to get the cash to pay tax on $20,000? Of course, the correct answer is you should have set aside the tax savings from year one to pay the taxes in years two through five, but in my experience, that rarely happens. The point is that when cash flow is tight, it is useful to align tax deductions with cash expenditures. While regular depreciation doesn’t do this perfectly, it’s much closer than Section 179.
Section 179 Deduction Frequently Asked Questions (FAQs)
This article has discussed the general rules for the Section 179 deduction. Much more could be said about Section 179. Below we answer questions that business owners often ask regarding taking the deduction.
Some common questions about the Section 179 deduction include:
Can the Section 179 deduction be taken on used equipment?
Businesses can claim a Section 179 deduction for new or used equipment as long as it was purchased and placed in service during the year. However, if equipment (perhaps a vehicle) is transferred from personal use to the business, the deduction cannot be claimed.
Can the Section 179 deduction be taken for leased property?
Leased equipment qualifies for the Section 179 deduction only if the business retains the incidents of ownership in the property. This is often not the case with leased property. The incidents of ownership include having title (ownership) of the equipment, among other things. See IRS Publication 946 for how to depreciate leased property.
Does Section 179 apply to real property?
In general, Section 179 does not apply to real property, but there is one important exception. Improvements to nonresidential real property qualify for Section 179 if the improvement is for the roof, HVAC, fire protection and alarm systems, and security systems.
Bottom Line
Claiming the 179 deduction can be a huge help to your business with substantial tax savings in the current year. With a generous limit of over $1 million, few small businesses have to wait to deduct their equipment through depreciation. However, watch for low tax rates and potential cash flow problems when you’re deciding to claim a Section 179 deduction.
QuickBooks Online can help you track the Section 179 property you purchase during the year. You can choose a local QuickBooks ProAdvisor and give them access to your QuickBooks Online account so they can help you decide whether Section 179 makes sense for your business. Visit QuickBooks to start your free trial.
