IRS Section 179: Deductions & Depreciation | Community Tax (2024)

What is IRS Section 179?

Section 179 of the IRS Tax Code allows a business to deduct the full purchase price of qualifying equipment and software that was purchased during the current tax year. At one time, it was often referred to as the “SUV Tax Loophole” or the “Hummer Deduction” because many businesses used this code to write-off the qualifying vehicles they purchased. That particular benefit of section 179 has now been reduced, but this tax code is still very beneficial to small businesses, perhaps now more than ever.

Section 179 Deduction

It used to be that when your business bought qualifying equipment, you could write it off a little at a time through as depreciating property. For example, if your company spent $100,000 on qualifying equipment or software, you would have been able to write off a percentage of that amount each year for the next few years—perhaps $20,000 per year in 5 years.

While any write-off is of benefit, many business owners would prefer to write off the entire equipment price for the year when they buy it. This way they are able to purchase all the equipment they need right away without worrying about carrying the cost from year to year. It makes a big difference when you are trying to get your business started and need to purchase a lot of equipment upfront without being in the black.

There are limits to IRS section 179. There are caps to the total amount written off ($1,000,000 in 2018), and limits to the total amount of the equipment purchased ($2,500,000). Once $3,500,000 in purchases is reached, the deduction goes away, making this deduction beneficial for small and medium-sized businesses.

• Can you take Section 179 on vehicles?

You can take the section 179 on vehicles, as long as the vehicle is used for business reasons more than 50% of the time. There are maximum deductions that can be taken for each type of vehicle as well: cars – $11,060; Passenger trucks and vans – $11,160; SUVs – $25,000 (for the 2017 tax year).

• Can you take section 179 on property?

Certain property that may qualify for the section 179 deduction: leasehold improvement property, restaurant property, and retail improvement property.

The list of properties that are ineligible for tax code 179 is a little longer, and includes: investment property, such as homes purchased for the sole purpose of flipping; rental property (unless your business is renting properties); property that produces royalties; land improvements, such as fences, swimming pools, or paved parking.

You’ll want to review the guidelines for depreciating property on the IRS website for a more detailed look at qualifying and non-qualifying properties.

To be sure you are maximizing your 179 tax deduction, bookkeeping services are always a good idea. They can help track your assets and work with your tax professional to ensure you claim all the deductions that you’re eligible for.

Section 179 Depreciation

Depreciation refers to the expenses related to a purchased asset over its useful life. Ordinary depreciation is also called “straight-line” depreciation because the depreciation expense is the same each year. So, for example, if a piece of business equipment costs $5,000 and its useful life is 5 years with regular depreciation, $1,000 would be written off each year for 5 years.

Because the useful life of many business assets don’t follow a straight line, the IRS allows accelerated depreciation. This puts the expense of the asset in the first year it is used. This change was made to benefit small businesses and stimulate the economy by encouraging expenditures on capital assets.

This is a simplified explanation, and depreciation for businesses can get complicated. Business accounting services specialize in the complexities of tax codes and they are a great resource for to make sure you’re completing your taxes correctly. Tax codes change often so it’s important to stay up-to-date because filing excessive claims can land you with an audit or a tax fraud charge.

Section 179 Limits

Your section 179 deduction is commonly the cost of the qualifying property. That being said, the total amount you are allowed to deduct is subject to a dollar limit and a business income limit. It’s important to understand that these limits apply to each taxpayer, not to each business. If you deduct only part of the cost of each qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct.

The limits can change yearly, so you’ll want to be sure you are looking at the current year’s limit. As stated above, the 2018 deduction limit is $1,000,000, and the spending cap on equipment purchases is $2,500,000. Once your equipment purchases exceed that number, the deduction reduces on a dollar for dollar basis.

Section 179 Carryover

If you have reached your deduction limit on a given tax year, you’ll want to know about carryover of disallowed deduction. For an unlimited number of years, a taxpayer may carry forward the amount of any cost of qualifying section 179 property elected to be expensed in a taxable year, but disallowed because of the taxable income limitation of that year. This carryover can be deducted in a future taxable year instead. Again, this can get complicated, and a tax professional can help if you find you are over the limit for deductions or income this taxable year.

Section 179 Recapture

A section 179 recapture occurs when you add income back to the section 179 deduction you took in a previous year. If you claim a section 179 deduction for the cost of property—and in some year after you place the property in service you do not use it primarily for business—you may have to recapture part of the deduction you took. This can happen in any tax year during the recovery period for the property. To calculate the recapture amount, subtract the depreciation that would have been allowable on the section 179 for prior tax years and the tax year of recapture from the section 179 deduction claimed.