What is a Section 179 tax deduction?

One of the tax planning strategies often employed by small businesses is to purchase long-term capital equipment at year end to reduce taxable income and corresponding tax liability for the current year.

There has been a lot of confusion in this area as Congress has continually changed the rules to stimulate the economy or slow down economic growth. For a small business owner it has been difficult to plan and to know the tax consequences of these capital expenditures over the past several years.

When a business buys certain types of long-term equipment, it typically gets to write off the cost of the equipment over a period of time through depreciation.

In other words, if a company spends $100,000 on equipment throughout the year, it would write off a percentage of this equipment over a period of time such as five years. Writing off the equipment over a period of time is better than nothing.

However, if a business could write off the entire amount in the initial year it might be more likely to add equipment this year instead of waiting until future years.

As part of the Protecting Americans from Tax Hikes Act of 2015 that was enacted in late 2015 the Section 179 deduction limit was expanded and made permanent at the $500,000 level. Without this new legislation the 2015 limit was set at $25,000 based on prior legislation.

This limit is good on new and used equipment, as well as off-the-shelf software purchases. This new limit has also been indexed for inflation for future years as well.

Section 179 of the IRS tax code essentially allows small businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.

This means that if a business buys a piece of qualifying equipment, the qualifying business can deduct the full purchase price from its income.

This is an incentive created by the government to encourage businesses to buy equipment and make investments in the future.

There are rules to the Section 179 deduction, however.

The new annual cap has been increased and made permanent at $500,000 per year and is being indexed for inflation. In addition, the deduction begins to be phased out if the business made more than $2,000,000 in equipment purchases during the year. This second limit of the $2,000,000 makes the Section 179 truly a small- to medium-sized business deduction as larger businesses would have equipment purchases that far exceed this $2,000,000 cap. You qualify for the Section 179 deduction if you buy long-term, tangible personal property that you use in your business more than 50 percent of the time. You cannot use the Section 179 deduction for purchases such as land, buildings, inventory, intangible property such as patents, copyrights and trademarks, or property used outside the United States. The property must be used primarily for your business. The deduction is not available for property that is used solely or primarily for personal purposes or to manage investments or produce nonbusiness income.

The Section 179 deduction is taken in lieu of taking a periodic depreciation deduction and allows a business to accelerate the deduction for a piece of equipment.

Now that Congress has made the Section 179 deduction permanent and indexed it for inflation small business owners can more effectively plan their capital purchases into the future. Small businesses will no longer have to wait until late December each year to see what Congress will enact for the year that is about to end.