A lot of people see Section 179 as confusing and complicated. But it doesn’t have to be.
We have collected some helpful questions to better understand Section 179, and, hopefully, allow you to better understand your business needs.
What is Section 179?
The Section 179 Tax Deduction of the IRS Tax Code allows you to write off the full purchase price of leased or financed equipment. However, there are many types of software that qualify as “equipment” in this sense, so please research your options in terms of this deduction. Whew, tax relief. Am I right?
Section 179 does have spending limits. The piece of equipment that you purchase must be put into use during the deduction year. Section 179 is incredibly useful for small businesses, as it helps maximize purchasing power.
Plain and simple – you can deduct the full purchase price of any qualifying equipment or machinery that you lease or buy within a tax year. If you can write off the entire purchase of a piece of equipment, it’s entirely possible to lease or purchase more equipment sooner. If you need it for your business, the government wants you to have it. It sounds too good to be true, doesn’t it? Incentives are nice.
How do I know that what I’m purchasing qualifies for Section 179?
Well, this is a great question. Most leasing equipment should qualify for the deduction. This section is made to help you – not hurt you. Businesses lease and finance many types of equipment on an ongoing basis throughout one tax year.
You will continue to lease and finance equipment associated with your business, right? Machines and equipment for business use qualify under this deduction. You are required to purchase AND put that equipment to use within the tax year (January 1, 2018 – December 31, 2018).
What’s my deduction limit?
The spending limit for Section 179 varies from year to year. For example, the deduction limit for 2017 was $500,000. The deduction limit for this year is $1 million, which is a huge difference. This is something you should be aware of as the tax year comes to an end.
How is Section 179 different than Bonus Depreciation?
Depreciation relates to the wear and tear of your machinery and equipment over time. Depreciation is a reduction. The taxpayer could recover part of the cost of the equipment/machinery. The assets of your company are going to decline in value the longer they are in use. Therefore, age directly affects value.
In the past, bonus depreciation has only covered NEW equipment. It is only offered in certain tax years; however, used equipment can now be deducted and is currently being offered at 100% for the year 2018. This is an extremely new and exciting change.
Section 179 is taken first, then is followed by Bonus Depreciation. This usually affects larger businesses who spend more than the Section 179 spending cap. The spending cap for 2018 for Section 179 is currently $2.5 million.
How do I get a deduction limit increase?
Unfortunately, this is not possible, as Section 179 is a true small business deduction. However, if you live in a certain geographic location in the United States, you may qualify for a larger deduction. These areas include:
- New York Liberty Zone – This was created after September 11, 2001 and is used to boost the economy. Though this does include the borough of Manhattan, there are only certain areas of the city that qualify. The World Trade Center area is included in the “Liberty Zone.”
- Enterprise Zone and Renewal Community Areas – These areas consist of rural communities (where jobs are scarce) or certain sections of large metro areas. This affects areas under development or require expansion.
- Gulf Opportunity Zone – This was implemented after Hurricane Katrina. This includes the areas affected by Hurricane Rita and Wilma. These deductions were essential in the rebuilding process of the area.
Again, there are stipulations for this increase. See if your business qualifies, as this will help you determine whether this deduction is right for you.
Has this article helped you better understand Section 179? Let us know in the comments!