From accounting fees to office supplies to website design, there is a seemingly endless number of tax deductions available to small business owners. But there is one tax deduction that some small business owners might not be familiar with or, if they are, require more information on how it works. We are talking about the Section 179 tax deduction. Huddle Business Capital created this helpful blog article to provide an overview of this widely used tax deduction.
It has all of the information about Section 179 that you need to know. Still, we recommend you talk to an accountant or tax professional before purchasing or financing equipment for your small business. The reason is not all types of equipment are eligible for a write-off.
Origin of Section 179.
Congress included a first-year depreciation allowance of $2,000 in the Small Business Tax Corrections Act of 1958. It was revised several times in the proceeding years, notably in 1981, with the Economic Recovery Tax Act that increased the expensing amount to $5,000. In 1986, the Section 179 tax deduction was introduced, doubling the expensing amount to $10,000.
Since its inception in 1986, Section 179 has undergone significant changes regarding deduction limits, with the original $10,000 limit increasing to six-figure amounts. The Section 179 deduction limit in 2023 is $1,160,000 on eligible business assets purchased or financed. Moreover, the phase-out threshold is $2,890,000, which means your qualifying deductions will decrease dollar-for-dollar after your equipment purchase(s) surpass $2,890,000.
What is Section 179?
In a nutshell, Section 179 of the U.S. Internal Revenue Code allows small businesses to take advantage of an immediate tax deduction for specific qualified business equipment and assets, also called property. This tax deduction is designed to help small businesses like yours save money and make investments in their business operations.
With Section 179, Section 179, you can write off the entire cost of equipment, vehicles, machinery, software, hardware, furniture, fixtures, and other property used for business purposes in the year you buy or finance it. To qualify for the deduction, the assets must be on the IRS' list of eligible property and acquired and used for business purposes by the annual deadline of December 31. Not all types of business assets can be deducted, so research before purchasing. In addition, your deduction amount cannot exceed your business's net income in the calendar year.
Benefits of Section 179.
As mentioned above, Section 179 enables you to deduct a sizeable amount spent on qualifying capital investment purchases. This in itself is the primary benefit of this tax code. You may find investing in much-needed business equipment and assets more affordable, knowing that you can deduct the cost from your company's taxable income.
Another benefit of Section 179 is that it lowers your current-year tax liability. Let us use a sports bar as an example. The owner financed $50,000 of new furniture, fixtures, and multiple point-of-sale (POS) systems, and the sports bar had $200,000 in net income for the year. So, the owner could deduct the entire $50,000 under Section 179.
Next, if you opt to finance equipment that qualifies for Section 179, you can get two benefits at once. First, you can write off the payments on your company's tax return, and second, you can keep your cash flow intact your cash flow by not making a large one-time purchase. As you know, it is wise to always have cash in your company bank account for business expenses.
How to get the deduction.
As mentioned in this Huddle Business Capital blog article, the equipment you purchase or finance must qualify for the Section 179 tax deduction; otherwise, you cannot write them off as business expenses. You will need to talk to an accountant or tax expert to get the details based on the equipment you want.
If they determine that the equipment is eligible for a deduction, they will walk you through the following steps and advise you on which tax forms you need to include in your company's tax return. For example, IRS tax form 4562 is the main form used to claim a deduction for depreciation and amortization.