Section 179: Learn More About This Business Tax Break
If you asked your average small business owner their opinion about the U.S. tax code in general, they probably wouldn’t have many nice things to say. “Annoying.” “Complex.” “Difficult to understand.”
But a select few areas of the U.S. code are actually quite helpful to small businesses – and Section 179 is perhaps chief among them.
Section 179 effectively helps businesses better afford vital equipment and technology. That’s because, rather than slowly depreciating that equipment over several years, Section 179 allows your business to deduct the full purchase price – whether it’s purchased outright or finance – during the tax year.
Given just how useful this tax break is, let’s take a few minutes to better understand the ins and outs of Section 179.
How Section 179 Works
Section 179 is one of a handful of tax incentives that are specifically designed for small businesses.
In short, if you buy a piece of qualifying new or used equipment for primarily business use, you can deduct the full price in the very same tax year.
It’s no small sum, either: In 2023, the deduction limit is $1.16 million.
What makes Section 179 a small business tax break, however, is the spending cap. Once your business reaches $2.89 million in spending on eligible equipment, the amount you can deduct will be reduced on a dollar-for-dollar basis. Thus, businesses who spend $4.05 million or more on qualifying equipment can’t utilize any amount of the Section 179 tax break.
Business owners looking to save money on their equipment should also note that some purchases might be eligible for bonus depreciation. The Tax Cuts and Jobs Act of 2017 created a calendar of bonus depreciation that began phasing out in 2022. In 2023, businesses can claim an 80% bonus depreciation – and that number will go down by 20 percentage points each year until reaching 0% in 2027.
What Is Qualifying Equipment?
Generally, equipment qualifies for Section 179 deduction if it’s …
- Most tangible property will qualify under Section 179. A few examples include machinery, equipment, furniture, cell phones and vehicles*. However, not-so-physical property – say, software – qualifies too, as do some improvements to a building’s interior or exterior. (Land and buildings do not qualify, however.)
- Used more business at least 50% of the time.
- Purchased or financed. However, leased equipment doesn’t fall under Section 179.
* Vehicles aren’t as straight-forward. Some clearly business-use vehicles, such as classic cargo vans, tractor trailers and heavy construction equipment will qualify for a full deduction. However, many passenger vehicles, trucks, SUVs and vans only qualify for limited deductions.
Business owners also should note that purchases don’t qualify if they’re made with any entity with which they have an existing relationship. (So, if you buy equipment from, say, a relative, or a second company you own, it’s not eligible.)
Do You Qualify for Section 179 and Other Tax Breaks?
Want to build a plan around investing in your company in a tax-friendly way? Looking for other small business tax breaks you can use to your advantage?
We’re here to help.
McManamon & Co. offers expert tax services to small and midsize businesses, from basic filings to payroll taxes to compliance services and more. One way we can put your company in the driver’s seat: Building a tax strategy that you can follow year-round to maximize your savings.
Let us get you through the tax season and beyond. Contact us at 440.892.8900 or online today.
Tags: McManamon, small business taxes, tax news, taxes | Posted in McManamon & Co., small business, small business taxes