Section 179 Deductions for Business Equipment Purchases
When you buy property, like a vehicle or machinery, for business uses, you can get tax deductions for buying and using them. These deductions are basically depreciation, the expense of buying property over a certain number of years. The good thing is that these deductions can save you money on your business tax return.
Even better, you may be able to take bigger deductions in the year when you first buy and begin using this property.
Updated Section 179 Tax Deductions for Businesses
The Tax Cuts and Jobs Act of 2017 increased the Section 179 benefit for businesses that buy assets and start using them.
Effective January 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital, with a limit of $2.5 million. After 2018, the limits are indexed to inflation. Businesses can now also take this deduction for nonresidential real property (buildings), including:
- fire, alarm and security systems, and
- HVAC (heating, ventilation, and air conditioning) systems.
What are Section 179 Deductions?
Section 179 of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time. Taking a deduction on an asset in its first year is called a “Section 179 deduction.” You can see that there is a benefit to taking the full deduction for the cost of the item immediately, rather than being required to spread out the deduction over the item’s useful life.
For example, if you buy a computer or other office equipment for your office, under Section 179 you can deduct the full cost of that computer in one year. This also makes sense, because we all know that computers have a short lifetime, or useful life.
So what types of business property does Section 179 apply to?
The IRS has two general requirements:
1. The property (called “qualified property”) must be “tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.” Vehicles, and (starting in 2018) land and buildings are included.
2. The property must be purchased and put into service in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it in your business. Buying a piece of property and then letting it sit and gather dust doesn’t count.
Annual Limits on Section 179 deductions
There are annual limits on the amount of Section 179 Deductions. For 2018 business tax purposes, the limits are:
- $1 million maximum on individual items of new and used equipment and purchased (off-the-shelf) computer software.
- Your business can spend up to a maximum of $2.5 million on Section 179 equipment. The deduction is reduced above this amount.
After 2018, these limits will be indexed to inflation.
If you deduct only part of the cost of qualifying property as a Section 179 deduction, you can generally depreciate the cost you do not deduct.
This means that you can spread out the remaining amount over the life of the property.
Disclaimer: Section 179 deductions are complicated. The information in this article, and on this site, is not intended to be tax or legal advice. Each business situation is different and tax regulations change frequently. Please consult your tax professional before buying property with the intent to take a Section 179 deduction.