For the 2023 tax year, Section 179 deduction allows business owners to deduct up to $1,160,000 ($1,220,000 for 2024) of the cost of qualifying new or used property, equipment, and vehicle purchases immediately. 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.
Determining how to treat asset purchases is an important part of calculating your small business taxes.
Tip:
Although similar, the Section 179 deduction differs from bonus depreciation, which allows a 80% deduction in 2023 (60% in 2024) for the purchase of new and used equipment. Any costs deducted as bonus depreciation aren’t included in the cost of Section 179 property.
What Is Section 179 Property & What Qualifies for Section 179 Deduction?
Section 179 property refers to property eligible to be immediately deducted with the Section 179 deduction. This 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 discussed below)
- Qualified improvement property, such as improvements to the interior made after the building was placed in service, such as drywall, interior doors, lighting, flooring, ceilings, fire protection, and plumbing
- Certain nonresidential real property improvements, such as 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
- Smartphones
What Section 179 Deductions Don’t Include
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 for certain improvements listed above
- Property received as a gift or inheritance
- Certain property purchased and leased to others
Vehicles as Section 179 Property
While vehicles are qualified as Section 179 property, they’re subject to special limitations. 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.
Would you like to learn how to track your mileage? Check out our recommendations for the best mileage tracker apps for small businesses.
Vehicles with a gross vehicle weight rating (GVWR) of 6,000 pounds or less have a maximum Section 179 deduction of $12,200 in 2023. Vehicles weighing more than 6,000 but less than 14,000 pounds have a higher limitation of $28,900 for 2023 ($30,500 for 2024). 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 | 2023 Section 179 Limits | 2024 Section 179 Limits |
|---|---|---|
Cars (Up to 6,000 Pounds) | $12,200 | $ TBA |
Passenger Trucks and Vans (Up to 6,000 Pounds) | $12,200 | $ TBA |
SUVs, Passenger Trucks, & Vans (Between 6,000 and 14,000 Pounds) | $28,900 | $30,500 |
Vehicles Modified for Nonpersonal Use (Including Ambulances, Hearses, Delivery Vans & Tow Trucks) | No limit | No limit |
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 for 2023 is $10,980 ($12,200 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 $1,160,000 for 2023 ($1,220,000 for 2024) is reduced dollar for dollar by the amount of Section 179 property purchased during the year that exceeds $2,890,000 ($3,050,000 for 2024). So, if over $3,780,000 is spent on eligible property in 2023, the maximum 179 deduction is reduced to zero and no 179 deduction is allowed. Any amounts not eligible for Section 179 can be depreciated under the normal MACRS rules.
For example, if you purchase $3 million of Section 179 property in 2023, your maximum deduction will be reduced by $110,000 (from $1,160,000 to $1,050,000). So, of your $3 million in purchases, you can deduct $1,050,000 immediately under Section 179. The remaining $1,950,000 must be depreciated over future years.
Section 179 Taxable Income Limitation and Carryover
The Section 179 deduction is a great tax saving tool, but there is a slight caveat that you should know about. The total amount of Section 179 deduction that you can claim in any given year isn’t only limited by the annual dollar limit, but it’s also subject to the taxable income limit. That means that the amount of Section 179 deduction you claim cannot exceed your taxable income.
Although this is the case, the IRS has granted business owners some grace. You’re allowed to carry over any disallowed cost for an unlimited number of years. This is one of the many reasons that this deduction is so great.
Section 179 Recapture
Remember that to qualify for the Section 179 deduction, the property must be used more than 50% of the time for business purposes. If the use falls to 50% or below, the Section 179 deduction that you claimed must be recaptured. You can think of Section 179 recapture as a way to repay the IRS for the tax benefit you received.
You’ll be required to recapture all or part of the Section 179 deduction. You’ll have to include this amount on your tax return, so you’ll need to know how to figure your Section 179 recapture amount.
How To Compute Recapture
To figure out recapture amounts, complete the following steps:
- Compute the amount of depreciation that would have been allowable on the property under regular MACRS. You should begin with the year the property was placed in service and include the year of recapture.
- Next, subtract the depreciation from Step 1 from the Section 179 deduction you claimed. The difference is the recapture amount.
Once you have figured out the recapture amount, include it in Part IV of IRS Form 4797.
Frequently Asked Questions (FAQS)
Can I use Section 179 every tax year?
Yes, Section 179 is an annual election. The maximum deduction is increased each year for inflation.
Can I finance equipment and take the Section 179 Deduction?
Yes, Section 179 allows you to deduct the cost of financed property even though you haven’t yet had to spend any cash.
Does the date that I purchased my equipment have an impact on Section 179?
Possibly. While Section 179 is a permanent part of the code and you can deduct the cost of equipment each year, the maximum deduction is applied on an annual basis and is adjusted for inflation
Bottom Line
Claiming the Section 179 deduction can be an immense help to your business, with substantial tax savings in the current year. With a generous limit of more than $1.1 million, few small businesses have to wait to deduct their equipment through depreciation.
