Under the Section 179 tax deduction, business owners can deduct up to $500K of qualifying property & equipment purchases for the 2017 tax year. It is often referred to as the “SUV tax loophole” or “Hummer deduction,” for its ability to quickly deduct vehicles purchases. For the 2018 tax year, Sec 179 deduction doubles to $1MM.
To make tax time a breeze, use QuickBooks to keep track of property & equipment purchased throughout the year. As you make these purchases, you can either scan the receipt into QuickBooks or enter the details into QuickBooks. Then, run a fixed asset listing report in QuickBooks, which you can use to complete Form 4562.
How the Section 179 Deduction Works
In general, when you purchase property, equipment, or vehicles, you are required to depreciate it over the amount of time it is expected to last (i.e. it’s useful life). This means that your tax deduction is typically spread over several years. However, with the Sec 179 deduction, you can recognize your full expense in the year that you purchased it.
Think of the Section 179 deduction as accelerated depreciation. Instead of waiting, 5, 7, 15 or more years to deduct big-ticket items like a vehicle or expensive equipment, you can elect to depreciate most, if not all of it, in the year of purchase. This is especially good for businesses that are starting up, as high business costs can hinder your future growth.
Below, you will find 3 situations in which you may not qualify to take the full $500,000 deduction for the 2017 tax year ($1MM for the tax year 2018) :
- The total cost of property placed in service exceeds $2 million ($2.5M for the 2018 tax year).
- Your business is an enterprise zone business.
- You are married filing a joint or separate tax return.
For more details on each of these, refer to IRS Pub 946. If you need help better understanding the IRS rules and regulations, it’s always best to use professional help. Check out our guide on the best virtual bookkeeping services for more information.
Section 179 Property, Equipment, & Vehicles That Qualify
In general, property, new and used equipment, and vehicles that have been purchased to use in your business may be eligible for the Section 179 deduction. This can include different types of equipment and can be either tangible personal or qualified real property. Property that you received as a gift or part of an inheritance is not eligible for the Section 179 deduction.
Below is a list of tangible personal property that may qualify for the Sec 179 deduction:
- New & used machinery and office equipment
- Property contained in or attached to a building, such as refrigerators, grocery store counters, signs
- Gas storage tanks and pumps found at retail gas stations
- Off the shelf computer software, such as QuickBooks and Microsoft Office
If you make the special election for real property, you can also treat certain qualified real property as Section 179 property. Below is a list of real property that may qualify for the Sec 179 deduction:
- Leasehold Improvement Property
- Restaurant Property
- Retail Improvement Property
Keep in mind that you can only use $250,000 of the $500,000 Section 179 deduction towards real property for the 2017 tax year.
The sooner you get educated on the new Trump Tax Plan, the more money you can keep. Along with equipment (computers, machinery), the Section 179 depreciation deductions for equipment has expanded to include residential rental properties, including improvement costs related to things like roofs, HVAC units, fire alarms and security devices. – Tom Wheelwright, CPA & Best-selling Author of Tax Free Wealth.
If you want to maximize your section 179 deduction it’s always best to use a virtual bookkeeping service. You can check out our ultimate guide on the best virtual bookkeeping service for more information.
List of Vehicles that Qualify for the Section 179 Deduction
You can also claim the Section 179 deduction for a vehicle that you have purchased this year. If the vehicle is used for both personal and business reasons it must be used more than 50% of the time for business to qualify for the Sec 179 deduction.
Below is a table summarizing the types of vehicles that qualify for Section 179 deduction and the maximum deduction that can be taken for each. In our car depreciation guide, we show you how to calculate your allowable Section 179 deduction.
Section 179 Vehicle Deduction List for 2017 Tax Year
|Type of Vehicle||Section 179 Limitation|
|Passenger Trucks and Vans||$11,160|
|SUVs (between 6000-14,000 lbs)||$25,000|
Property That Is Ineligible For Section 179
Property that you have purchased solely for the income that it will generate is not eligible for the Section 179 deduction. This property includes but is not limited to the following items:
- Investment property, such as homes purchased for the sole purpose of flipping. Check out taxes on flipping houses guide to learn more.
- Rental property (unless you’re in the business of renting properties)
- Property that produces royalties
- Land and improvements, such as fences, paved parking or swimming pools
Section 179 Deduction Limit
For the 2017 tax year, the maximum annual Section 179 deduction that you can take is $500,000. If you purchase multiple properties, equipment, or vehicles that qualify for this deduction but exceed the $500K limit in total, you can decide which items to use Sec 179 for (not to exceed $500K). For the equipment that was not included in Sec 179, you may be eligible to take bonus depreciation, which we will explain next.
Understanding your deduction limit is always best with the help of a bookkeeping service. If you’re in need of bookkeeping and accounting help you should check out our ultimate guide on the best virtual bookkeeping service.
Bonus Depreciation for Purchases over $500,000
Businesses can take an additional 50% bonus deduction (100% for the 2018 tax year) for equipment purchases that exceed $500K ($1MM for the 2018 tax year). This provision is generally used by large companies that purchase a lot of equipment. However, unlike Section 179, bonus depreciation does not apply to leased equipment.
Bonus depreciation kicks in only after you have reached the Section 179 spending limit. After deducting bonus depreciation, any amount that remains will be depreciated using the MACRS depreciation method. Let’s take a look at an example:
Section 179 Deduction Example
If a business spends $800,000 on equipment and vehicles, it will first elect the $500,000 Section 179 deduction. In addition, it can deduct 50% of the remaining $300,000 (as bonus depreciation), which equals $150,000. Ultimately, the business will be able to deduct $650,000 on the $800,000 purchase in the first year. The remaining $150,000 will be depreciated using the MACRS depreciation method.
How To Elect the Section 179 Deduction
You can elect to take the Section 179 deduction by completing Part I of Form 4562: Depreciation and Amortization. Below is a snapshot of the Section 179 section.
In order to complete Form 4562, you need to understand some basic terminology:
- Property placed in service – When property or equipment is available and ready to use in business, it is considered to be “placed in service”. For example, let’s say you purchased a used truck on January 1. You got a good deal on the truck because it needed some repairs. All of the repairs were completed on February 1. The truck is considered to be placed in service on February 1, because that is when it was ready for you to use in your business.
- Threshold cost of Section 179 property – In general, the maximum amount that most businesses can deduct for Section 179 is $500K. However, if your total property purchases exceed $2,010,000 then you will not be eligible to take the full $500K deduction. See Instructions for Form 4562 for more details.
- Listed property – Listed property generally includes passenger automobiles that weigh 6,000 lbs or less, any other property used for transportation if the nature lends itself to personal use (i.e. motorcycles, pickup trucks, SUVs), computers or peripheral equipment.
Claiming the 179 deduction can be a huge help to your business. Now that you know more about the Section 179 deduction, I’m sure you’re eager to know how much you qualify for. Head over to the Section 179 Calculator to find out how much potential tax savings you can receive.
Make tax time a breeze by using TurboTax. TurboTax will automatically calculate Section 179 deduction as well as all of the deductions that your business qualifies for. Take TurboTax for a test drive to see how easy it is to use with a free 30-day trial.