Section 179 Tax Deduction Guide

section 179 tax guide

Millions of small business owners throughout the country are in the same position as you – looking for ways to save money without sacrificing quality or customer service. Stretching every dollar is an intelligent business move because it provides a nice financial cushion during unexpected slow sales periods or sudden economic downturns. One way that business owners are saving money is by taking advantage of the Section 179 tax deduction. If you are not familiar with this IRS tax code, this Balboa Capital blog post is your Section 179 tax deduction guide.

It has all the critical information you need to know, such as the 2021 deduction and bonus depreciation limits. Read on to learn how you can put Section 179 to work for your business.

How it all started.

The Section 179 tax deduction dates back to 1981, when it became part of the Economic Recovery Tax Act (ERTA). It was enacted to boost the economy by giving unique tax benefits to businesses. It allows business owners to deduct all or part of the purchase price of equipment in the year it is acquired and put into use. This is an excellent alternative to removing the cost basis over several years.

The only stipulation is that the equipment, also referred to as property, must qualify for the deduction. There are many types of qualifying equipment, everything from office furniture and computers to business vehicles, software, machinery, and more. Before making a capital equipment purchase, it is a good idea to check the IRS Section 179 web page to see a list of eligible equipment. Moreover, you should consult with a business accountant or a tax professional to determine if the equipment you want qualifies.

Current section 179 deduction limits.

When the Tax Cuts and Jobs Act (H.R.1) was signed into law in December 2017, the Section 179 tax deduction limit increased to $1 million on qualifying equipment. The spending cap on equipment purchases increased to $2.5 million. In addition, bonus depreciation is set at 100% through 2022, and it now applies to certain types of used equipment.

Section 179 applies to cash purchases and financed equipment so that you can choose the best option based on your unique financial situation and equipment needs. To get an idea of how much you might be able to deduct, use this handy Section 179 tax deduction calculator.

Understanding bonus depreciation.

The next topic in our Section 179 tax deduction guide is bonus depreciation, which can be confusing. Bonus depreciation is an IRS tax rule that lets you deduct additional depreciation for the cost of equipment beyond the regular depreciation allowance amounts. You need to elect the deduction first and the bonus depreciation second.

By combining both, you can boost your deduction amount. As mentioned earlier in this blog post, bonus depreciation will remain 100% through 2022. Therefore, many small business owners are making equipment purchases before bonus depreciation drops to 80% in 2023.

More than a tax deduction.

The ability to deduct capital equipment expenses is by far the most attractive benefit of Section 179. However, what about the positive impact that new or upgraded equipment can have on your business? In today’s highly competitive business world, the right equipment can set your small business apart from the competition, improve your operational efficiency, and help drive profits.

Many types of equipment have a short lifespan or can become outdated quickly, resulting in many problems relating to productivity. In addition, faulty or outdated equipment can even put employees’ safety at risk in some industries. To prevent these things from happening, you need to invest in new or upgraded equipment when required.

How to get the deduction.

Electing the Section 179 deduction is a relatively straightforward process, and it can be done quickly with the help of an accountant or tax professional. You will need to complete Part 1 of IRS form 4562 and attach it to your tax return. However, here is something important to remember: Just because you purchase or finance qualifying equipment or property does not mean the deduction will automatically be facilitated with the IRS.

To move forward with a Section 179 deduction, you need to elect to take it and complete and file the necessary IRS form and any additional paperwork, if required. If you plan to expense the cost of qualifying business equipment over consecutive years, discuss this in advance with your accountant. They will let you know if you can use the Section 179 carryover provision.

The information in this blog post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, investment, or accounting advice. You should consult with your accountant, lawyer, or tax advisor before making any business decisions or moving forward with business funding.