The Section 179 tax deduction allows business owners to deduct the full cost of qualifying property and equipment purchases, up to $1 million for the 2018 tax year. Businesses can also write off the full cost of equipment through bonus depreciation, which makes this is a viable alternative to the Section 179 deduction starting in 2018.
What Is Section 179?
Section 179 is a type of tax deduction related to business depreciation. The name refers to where this deduction is found in the tax laws: Internal Revenue Code Section 179. Section 179 allows businesses to deduct the entire cost of equipment and property, which can significantly lower taxes in the year assets are purchased.
How the Section 179 Deduction Works
With the Section 179 deduction, businesses deduct the full cost of the newly acquired equipment, vehicles, and other fixed assets, up to $1 million total, in the year the asset is placed in service. Basically, businesses write off the entire cost of assets in the year purchased rather than spread the cost over multiple years.
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 depreciate the entire cost in the year of purchase. This makes the Section 179 deduction right for just about any business looking to maximize their tax savings.
The Section 179 deduction is right for businesses in the following situations:
- Businesses Starting Up: Business owners tend to buy machinery, furniture, computers, and other long-lived assets in the early years of the business. Deducting the full cost of these assets keeps taxable income lower, resulting in lower taxes.
- Simplified Bookkeeping: You won’t have to capitalize your asset purchases and depreciate them over several years. With the Section 179 deduction, you just need to record the asset purchase as an expense.
- Business Owners in High Tax Brackets: Taking the Section 179 deduction when entrepreneurs are in a relatively high tax bracket provides bigger tax savings compared to years when you are in a lower tax bracket.
However, there are two situations in which you may not qualify to take the full $1 million deduction for the 2018 tax year:
- The total cost of property placed in service exceeds $2.5 million: In this situation, the Section 179 deduction limit starts to be reduced. (This is called the investment limit. For the 2017 tax year, this investment limit was $2.03 million.)
- You are married filing a joint or separate tax return: Spouses will need to agree on how to share the Section 179 limit. Absent an agreement, the $1 million limit is split between each spouse equally.
For more details on each of these, refer to IRS Publication 946. If you need help to better understand the IRS rules and regulations, it’s always best to use professional help. Check out our guide on the best virtual bookkeeping services to help you find a bookkeeping service to take care of your record keeping and to provide advice.
Property Types Eligible for Section 179
Certain types of new and used machinery, equipment, vehicles, and other tangible property are eligible for the Section 179 deduction. New for 2018, some improvements to non-residential real estate are eligible for the Section 179 deduction. The tangible property or real estate must be used for business purposes. Property received as a gift or as part of an inheritance is not eligible for the Section 179 deduction.
Eligible Section 179 Tangible Property Deductions
The tangible property that may qualify for the Section 179 deduction includes:
- New and used machinery and office equipment
- Property contained in or attached to a building, such as refrigerators, grocery store counters, and signs
- Gas storage tanks and pumps found at retail gas stations
- Livestock such as cattle, sheep, and goats
- Portable air conditioners
- Off-the-shelf computer software, such as QuickBooks and Microsoft Office
Eligible Section 179 Non-Residential Real Estate Deductions
The Section 179 rules changed in 2018 for improvements made to non-residential real estate. For 2018, businesses can take a Section 179 deduction for interior improvements to non-residential buildings, subject to the same dollar limitations. However, enlargements, elevators, escalators, and improving the internal structural frameworks of buildings do not qualify for the Section 179 deduction.
Starting with the year 2018, the non-residential real estate improvements eligible for the Section 179 deduction are:
- Improvements to the interior of non-residential (commercial) buildings
- Heating, ventilation, and air-conditioning systems
- Fire protection and alarm systems
- Security systems
This is different from 2017, when only leasehold improvements, retail improvements, and improvements to restaurants qualified for the Section 179 deduction.
“The Section 179 is still beneficial for small business only in the limited situation like with HVAC (roofs, fire alarms, and security), where bonus depreciation isn’t allowed. A good example of bonus being better than 179 is for trucks. Under 179, the deduction is limited to $25,000. Under bonus, the deduction is unlimited (trucks over 6,000 lbs.).”
– Tom Wheelwright, CPA and 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. We recommend Bench because they are affordable and work with companies of all sizes. They will coordinate with your tax professional to ensure you’re able to take advantage of all of the tax deductions you qualify for, including Section 179. Plans start at just $95 per month. Get your first consultation and a set of business financial statements for free.
Eligible Section 179 Vehicles Deduction
You can also claim the Section 179 deduction for vehicles 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 Section 179 deduction.
In order to deduct a vehicle, you will need to track the number of miles you drive. One of the best ways to track your mileage is to use an app such as Everlance. With Everlance, you can automatically track mileage and expenses for free. Click here to download the Everlance app on iOS or Android.
The Section 179 vehicle list of 2018 deduction limitations is:
Section 179 Vehicles Deduction Limits for 2018
|Type of Vehicle||Section 179 Limitation|
|Passenger Trucks and Vans (up to 6,000 lbs)||$10,000|
|SUVs, Passenger Trucks, and Vans (over 6,000 lbs)||$25,000|
|Vehicles modified for nonpersonal use (ambulances, hearses, delivery vans, and tow trucks)||No limit|
Property Types 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 the 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 to land, such as fences, paved parking, or swimming pools
Section 179 Deduction Limits
For tax year 2018, the maximum Section 179 deduction is $1 million. If total equipment purchases exceed the $1 million limit, you can decide which items to deduct under Section 179. The $1 million limit is reduced if a business invested more than $2.5 million into Section 179 qualifying equipment during the year.
Note: For the 2017 tax year, the maximum annual Section 179 deduction that you could take was $510,000, and the investment limit was $2.03 million.
To make sure you understand your deduction limit correctly, it’s best to consult a bookkeeping service. If you’re in need of a bookkeeping service, check out Bench. They will help you track your assets and work directly with your tax professional. Plans start at $95 per month. Your first consultation is free.
How to Elect the Section 179 Deduction
You can elect to take the Section 179 deduction by completing Part I of Form 4562. This form summarizes your depreciation deductions for the year, and is included with the tax return for your business entity (for example, LLC).
Below is a snapshot of the Section 179 section for IRS Form 4562:
In order to complete Form 4562, you need to understand some basic terminology:
- Property placed in service: The date when property or equipment is available and ready to use in business. Let’s say you purchased a used truck on January 2, but it needed some repairs. The repairs were completed on February 1. The truck is considered to be placed in service on February 1, as that is when it was ready 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 $1 million. However, if your total property purchases exceed $2.5 million, then you will not be eligible to take the full $1 million deduction. See Instructions for Form 4562 for more details.
- Listed property: Includes passenger automobiles that weigh 6,000 lbs. or less; any other property used for transportation if the nature lends itself to personal use (e.g., motorcycles, pickup trucks, SUVs); computers or peripheral equipment; and photographic, phonographic, communication, and video-recording equipment.
When to Consider an Alternative to the Section 179 Deduction
Bonus depreciation is an alternative to the Section 179 deduction that allows businesses to deduct the full cost of equipment purchases. In most cases, bonus depreciation has the exact same result as taking the Section 179 deduction. Businesses should consider bonus depreciation instead of Section 179 deduction in three situations.
The three situations when bonus depreciation is more advantageous than Section 179 deduction:
- Cars and Passenger Trucks: Businesses can potentially get a bigger deduction, as the annual bonus depreciation limit is $18,000 per car versus $10,000 for the Section 179 deduction.
- More than $1 million in equipment: Bonus depreciation does not have a maximum on the amount that can be deducted.
- Equipment purchases exceed net income: Bonus depreciation can produce a business loss. By contrast, the Section 179 deduction can zero out net business income, with any excess Section 179 deductions carried over to next year.
Businesses can use bonus depreciation to create a net loss for the year. This is advantageous when owners can use the business loss to offset other income and reduce their taxes. By contrast, the Section 179 deduction can reduce business net income to at most zero, but cannot generate a loss. You can, however, carry forward any excess Section 179 deductions to offset earnings in the future.
Differences Between Section 179 & Bonus Depreciation
Bonus depreciation and the Section 179 deduction are similar: both enable a business to deduct the full cost of equipment, machinery, and other qualifying property. The types of property that qualify are different between the two. The Section 179 deduction is limited to $1 million, while bonus depreciation has no annual limit.
Bonus depreciation has a higher dollar limit of $18,000 for cars and passenger trucks purchased during the year. The Section 179 deduction for cars and trucks is limited to $10,000. However, the Section 179 deduction for heavy SUVs is higher, at $25,000.
Bonus Depreciation vs Section 179 Comparison
|Vehicle Deduction Limit|
Section 179 Deduction Example
Let’s say a business spends $750,000 in equipment and vehicles during 2018 and has a $500,000 profit before depreciation. The business can (1) use the Section 179 deduction alone and carry forward the excess to a future tax year, (2) use bonus depreciation alone, or (3) use the Section 179 deduction in combination with bonus depreciation.
In our example, the Section 179 deduction and bonus depreciation would be:
- Section 179 Deduction Alone: $500,000 Section 179 deduction and $250,000 Section 179 carryforward to future tax years.
- Bonus Depreciation Alone: $750,000 bonus depreciation, creating a loss of $250,000.
- Section 179 Deduction and Bonus Depreciation Combined: $500,000 Section 179 deduction and $250,000 bonus depreciation. This zeroes out profit and $250,000 Section 179 carryforward to next year.
The deciding factor is how much net profit or loss that the business owners desire. Section 179 deductions can reduce net profit down to zero with the remainder carried forward to next year. The carryforward deduction reduces next year’s tax, which is advantageous. Bonus depreciation, however, can generate a net loss. This is advantageous if business owners want to use the business loss to reduce taxes on other income.
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 Section 179 deduction. If you have questions, feel free to post them in the Fit Small Business Forum.
Some common questions about the Section 179 deduction include:
Can the Section 179 Deduction Be Taken on Used Equipment?
Yes. Businesses can claim a Section 179 deduction for equipment purchased during the year. It doesn’t matter whether the equipment is new or used. The more important thing: If a business owner already owns machinery or a car personally, and starts using that for business purposes, then the Section 179 deduction cannot be claimed.
Can the Section 179 Deduction Be Taken for Leased Property?
Sometimes. 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.
When Would a Business Not Want to Take the Section 179 Deduction?
Businesses might want to opt out of the Section 179 deduction and claim regular depreciation instead if the business has relatively modest income this year and expects to have significantly more income in the near future. This pushes depreciation deductions to future years when the business owner expects to be in a higher tax bracket.
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.