A quick overview of Section 179
If you own a small business and use commercial equipment, you’ve likely heard of this IRS tax code that allows you to recover all or part of the cost of qualifying equipment, by deducting it in the year you put it into service. In essence, the goal of deducting the total depreciation expense of the equipment within the current year is to reduce a company’s taxable income and leave incentives for more purchasing in the future by optimizing cash flow.
Depreciation is a method for recovering the costs of fixed assets acquired for your business use over a period of time. A general example of depreciable assets are as follows.
• 3 year -tractor, manufacturing tools.
• 5 year- computer, office equipment, cars, light trucks, construction equipment.
• 7 year- Office furniture.
There are other standard tax depreciation methods like Straight Line Depreciation and 200% declining balance, also known as MARCS, or Modified Acceleration Cost Recovery System. Investopedia explains that “MACRS allows for faster depreciation in the first years of an asset’s life and slows depreciation later on. This is beneficial to businesses from a tax perspective.” MARC’s is a useful tool, but Section 179 comes into play so that you can better manage your tax payments. Depending on how much equipment you’ve acquired, and in what years, it would be useful to utilize Section 179 to ensure you don’t have a hefty tax payment. Section 179 does have a limit on how much you can deduct and has a ‘phase out’ of benefits after a certain dollar amount is reached.
Section 179 currently works as follows:
o Deduct up to $1,040,000 in qualifying assets for 2020, and $1,050,000 for 2021
o Phase out begins after $2,590,000 for 2020, $2,620,000 for 2021
o Sport utility vehicles limited to $25,900 for 2020, $26,200 for 2021
o Luxury vehicles are limited to $18,100 for both years
For a more in-depth explanation of Section 179 and how to know if you qualify, read our Section 179 Tax Deduction article.
If you’re looking to acquire equipment for tax break purposes, financing is a great way to get your asset and depreciate the machine in full even though you’re paying in small monthly increments. It gives you a lot more cash on hand to start next year strong. If you have more questions regarding Section 179 or want to apply for financing, contact us at (949) 271-5800 or learn more here.