The Section 179 deduction allows business owners to immediately deduct up to $1,050,000 of the cost of qualifying new or used property, equipment, and vehicle purchases for the 2021 tax year. The advantage of the deduction is that you immediately receive the tax savings from an equipment purchase rather than gradually saving taxes through depreciation in future years.
For example, under normal depreciation rules, the cost of a computer will be deducted over five years. The advantage of the Section 179 deduction is that the cost of the computer can be immediately deducted. Most business owners would prefer to have a tax deduction now vs five years from now.
Tip: Although similar, the Section 179 deduction is different from bonus depreciation, which also allows a 100% deduction in 2021 for the purchase of new and used equipment. Any costs deducted as bonus depreciation aren’t included in the cost of Section 179 property.
You can elect to expense part or all of the cost of Section 179 property that you placed in service during the tax year and used more than 50% of in your trade or business.
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, office furniture, tools, and equipment
- New and used vehicles (subject to some special limitations)
- Certain nonresidential real property improvements, including roofs; heating, ventilation, and air conditioning (HVAC); fire protection and alarm systems; and security systems
- Computers, off-the-shelf software, printers, and other computer equipment
Not all business purchases qualify for the Section 179 tax deduction. This deduction only applies to physical items, and you also cannot use it to deduct land and real estate. It also doesn’t include:
- Intangible assets, such as patents and copyrights
- 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
- Certain property purchased and leased to others
While vehicles are qualified as Section 179 property, they’re subject to special limitations.
Vehicles as Section 179 Property
You can claim the Section 179 deduction for both new and used 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 Section 179 deduction.
The law requires written evidence of the business miles 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.
Would you like to learn more about other ways to track your mileage? Check out our recommendations for the best mileage tracker apps for small businesses.
Section 179 Vehicles Deduction Limits for 2021
Vehicles with a gross vehicle weight rating (GVWR) of 6,000 pounds or less have a maximum Section 179 deduction of $10,200. Vehicles weighing more than 6,000 pounds have a higher limitation of $26,200. No depreciation or Section 179 limits apply to vehicles with a GVWR of more than 14,000 pounds or to vehicles that have been modified for nonpersonal use.
Type of Vehicle
Section 179 Limitation
Passenger Trucks and Vans (Up to 6,000 Pounds)
SUVs, Passenger Trucks, and Vans (More Than 6,000 Pounds)
Vehicles Modified for Nonpersonal Use (Including Ambulances, Hearses, Delivery Vans, and Tow Trucks)
The Section 179 limitation must be reduced for vehicles that aren’t used 100% for business. For instance, if a car is used 90% for business, then the maximum deduction is $9,180 ($10,200 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
Section 179 is elected by completing Part 1 of Form 4562. This form summarizes your depreciation expense and is included with your business return.
The maximum Section 179 deduction of $1,050,000 for 2021 is reduced dollar for dollar by the amount of Section 179 property purchased during the year that exceeds $2,620,000. Any Section 179 deduction claimed reduces the cost of the asset that can be depreciated over future years. If an amount of more than $3,670,000 is spent on eligible property, it won’t be eligible for the Section 179 deduction.
For example, if you purchase $3 million of Section 179 property, your maximum deduction will be reduced by $380,000 (from $3 million to $2,620,000). So, of your $3 million in purchases, you can deduct $670,000 (reduced from $1,050,000 to $380,000) immediately under Section 179. The remaining $2,330,000, which is $3 million minus $670,000, must be depreciated over future years.
Claiming the Section 179 deduction can be a huge help to your business, with substantial tax savings in the current year. With a generous limit of more than $1 million, few small businesses have to wait to deduct their equipment through depreciation.
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.