So, what exactly is Section 179?
For starters, the name is in reference to Section 179 of the IRS tax code, which allows small to medium-sized businesses to deduct up to $1 million worth of qualifying equipment or software from their net income if it was purchased or financed within that tax year (which runs from April 1 – March 31). 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.
Are there restrictions to Section 179?
Simply put, yes. Your business’s equipment purchasing cannot exceed a total of $2,500,000 to qualify for the (up to) $1,000,000 write off. After $2,500,000 is spent, the deduction begins to reduce on a dollar-for-dollar basis. For example, if you purchased $3,000,000 worth of equipment in the current tax year, you would only qualify for a deduction up to $500,000. After $3,500,000 is spent the entire deduction becomes obsolete. This is how the IRS ensures that the deduction is for small to medium-sized businesses. However, if you are like most small business owners, your equipment expenditure is generally under $100,000 and is eligible for the full write off.
Remember that Section 179 applies for qualifying equipment and software. Some software does not qualify, which includes custom-written software, databases (unless it’s in the public domain and incidental to other qualifying software), and websites. A popular use of Section 179 is for the purchasing of vehicles. While most vehicles with a low chance of being used for personal reasons and can fully qualify for the deduction, some have a deduction limitation of $11,160.
What does Section 179 mean for my business if I lease?
Think about it this way. Your business would be able to deduct the full cost of the equipment without paying the full amount for it in that year. For example, if you leased a piece of equipment right before the tax season ended and take the Section 179 deduction, you would reduce your taxable income without making any payments. The tax savings alone is likely to leave your bank account in better standing than if you never financed the equipment to begin with.
Does my business qualify for Section 179?
Assuming that your small to medium-sized business spends $2.5 Mill or less on a purchase, finance, and/or lease of equipment it should qualify for the Section 179 Deduction of that tax year. Also, 50 percent or more of your equipment and/ or software must be for business use to be eligible.
If you have more specific questions in regards to Section 179 talk to your accountant.
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