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Taxes can be a headache, especially when you’re unsure of the technical rules.
Section 179 allows taxpayers to take an immediate tax deduction for property placed in service during the year instead of deducting the cost over several years.
This article will explain the Section 179 rules and help you understand how to take advantage of the tax deduction.
You’ll also get a step-by-step guide for compliance with Section 179 tax reporting requirements.
What Is Section 179?
Section 179, described in Internal Revenue Code Section 179, is a tax depreciation deduction. Taxpayers can take the Section 179 tax deduction for business equipment purchases. The rules encourage business growth by incentivizing equipment purchases.
Eligible property should meet IRS requirements, which we’ll discuss next.
Who Is Eligible for Section 179?
The following business types may take the Section 179 tax deduction:
Pass-through entities should report the Section 179 expense and pass the tax deduction on to the business owners. Trusts and estates are not eligible for the Section 179 deduction.
Consult your tax professionals to discuss which tax deductions your business can take.
What Property Is Eligible for the Section 179 Tax Deduction?
The IRS allows a deduction for various types of business property, including the following:
The following property is not eligible:
How Does Section 179 Work?
Your business may take a Section 179 deduction on its tax return for the same year it purchases eligible property.
Your business must actively use the property at least 50% of the time. For example, a new espresso machine for your coffee shop is likely eligible, while a new espresso machine for your home kitchen is not.
Your business is not required to deduct the entire cost of the property – you may choose to take a portion (or none) of the available deduction.
Why is Section 179 beneficial?
Traditional depreciation rules require taxpayers to deduct property costs over several years. In contrast, Section 179 allows taxpayers to deduct the cost of the property right away. Your business can benefit by aligning tax deductions (and lower taxable income) with equipment purchases.
2023 Section 179 Limits
The IRS imposes annual limitations on each taxpayer’s Section 179 deduction. Consider the following rules to determine your Section 179 tax deduction for the year.
The Dollar Limit and “Phase-Out” Threshold
The tax year 2023 Section 179 dollar limit, or maximum deduction, is $1,160,000. Sport utility vehicles have a $28,900 deduction limit.
The Section 179 dollar limit phases out for taxpayers who purchase eligible property totaling more than $2,890,000. Purchases above the threshold reduce the maximum deduction. The Section 179 dollar limit decreases to zero once equipment purchases total $4,050,000.
For example, imagine your business bought new office equipment totaling $3,500,000 in 2023. The maximum Section 179 deduction would be $550,000:
| Total eligible property purchased in 2023 | $3,500,000 |
| Less: 2023 IRS phase-out threshold | ($2,890,000) |
| Excess of eligible purchases in 2023 | $610,000 |
| 2023 IRS Section 179 dollar limit | $1,160,000 |
| Less: Excess of eligible purchases in 2023 | ($610,000) |
| 2023 Reduced Section 179 dollar limit | $550,000 |
The Section 179 Business Income Limitation
After applying the Section 179 dollar limit, each taxpayer can take a Section 179 deduction to the extent of their taxable income.
If your taxable income limit prevents you from taking your entire Section 179 deduction, the IRS offers relief: You can carry the excess to the following tax year.
Continuing the above example, imagine your 2023 business taxable income was $400,000 without the Section 179 tax deduction. Even though your Section 179 dollar limit was $550,000, your 2023 business income limitation would be $400,000.
However, your business could carry forward the remaining $150,000.
Want to know how the phase-out threshold and business income limitation apply to your business? Check with professionals for help with tax calculations.
Bonus Depreciation and How It Works with Section 179
Bonus depreciation, governed by Internal Revenue Code Section 168(k), follows separate, complex rules. Generally, taxpayers may deduct 80% of the cost of eligible property placed in service during 2023.
How does bonus depreciation work with Section 179?
Your business should deduct Section 179 depreciation first. After calculating your Section 179 tax deduction, determine whether your remaining property is eligible for bonus depreciation. Your bonus depreciation deduction represents 80% of the remaining property cost.
How to Claim the Section 179 Deduction
Follow our step-by-step guide to take advantage of your Section 179 tax deduction. We also recommend referring to the detailed instructions in IRS Publication 946.
Step 1: Determine Which Property Qualifies for Section 179
Gather your equipment purchase records. Consider the property you placed in service during the year and determine your eligibility for the Section 179 deduction.
Remember, your business should actively use the property at least 50% of the time.
Step 2: Figure Your Section 179 Dollar Limit
Did you purchase less than $2,890,000 of eligible property in 2023? If so, you’re entitled to the entire Section 179 deduction, depending on your taxable income. Refer to the phase-out threshold if your purchases exceed the limit.
Follow the separate limitations that apply to sport utility vehicles.
Step 3: Calculate Your Business Income Limitation
Your Section 179 depreciation is limited to your taxable income without the deduction. Determine your taxable income to figure out the maximum deduction you can take.
Step 4: Complete IRS Form 4562, Part I
IRS Form 4562 reports the depreciation expense deducted on your tax return. Fill out Form 4562, Part I, to elect the Section 179 tax deduction. Complete each line to compute your business deduction.
Refer to the Form 4562 instructions as you complete the form.
Need help? Consult tax professionals who can guide you through Section 179 calculations and compliance.
Impact of Section 179 on Business Planning
The Section 179 tax deduction can be valuable when planning business purchases.
If your business is preparing for large equipment purchases, you might wish to delay some purchases until the following tax year. You may be able to ensure greater deductions by keeping your purchases below the phase-out threshold each year.
Additionally, the Section 179 deduction might not benefit a taxpayer with a low business income limitation. The taxpayer could forego the Section 179 deduction and instead follow traditional depreciation rules.
Is your business planning an acquisition or large property purchases? Review our tax deduction checklist and consult with professionals to maximize your Section 179 deduction.
Partner with Business Tax Professionals
Want to take advantage of the Section 179 tax deduction?
Follow the steps in this article as you calculate your deduction and complete your tax return. Don’t forget to consult small business tax professionals with questions about tricky rules.
Partner with 1-800Accountant tax professionals, who can help you understand how the rules apply to your business. You shouldn’t have to work through the Section 179 nuances alone.
1-800Accountant can help you calculate depreciation and maximize your deductions.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.