Section 179 expensing can be a very powerful tax-planning tool for small- and medium-sized businesses acquiring capital assets. While it doesn't change the amount of depreciation you can take over the life of capital purchase, it can change the timing by allowing you to deduct your purchase in the first year you place it in service.
How does Section 179 Work?
Generally, when you purchase a piece of equipment for your business — say a $10,000 computer system — you can't deduct the entire cost in the year it was purchased. It must take the expense by depreciating the cost over several years.
Section 179 allows you to deduct the cost of the $10,000 computer in the year it was purchased and placed in service. You can deduct the expense of up to $510,000 of qualified property. The $510,000 deduction begins phasing out dollar for dollar if $2.03 million or more of qualified property is purchased during the year (meaning it phases out completely after you've purchased $2.54 million in business capital assets).
What is Qualified Property?
Qualified property includes things like tangible personal property, computer software and qualified real property (e.g., interior building costs for nonresidential buildings).
Section 179 doesn't apply to property acquired for use in a rental property if it's not your trade or business but simply an investment. Some vehicles qualify for Section 179 expensing, within limits. (The limits were brought about when some business owners bought expensive Hummers and expensed the cost in a single year.)
If you are considering your options for depreciating your business assets under Section 179, here are important details to remember:
- Section 179 allows deducting the expense of up to $510,000 of qualified business purchases.
- A Section 179 deduction cannot create a loss for the business.
- A Section 179 deduction must be for business use. If an asset is not entirely used for business, the allowance is reduced.
- If you sell a Section 179 asset prior to the full depreciation period, you will have to record any sales proceeds as taxable income.
- Many states limit the use of this federal shifting of depreciation.
Taking Section 179 for capital purchases can be useful, but it's not for everyone. Using Section 179 for an immediate tax break means it’ll no longer be available for future years. Consider this as you manage your business's tax obligation.