Under the tax laws, business owners are allowed to recover all or part of the cost of certain purchases up to a certain limit by deducting it immediately in the year the property is placed into service. The provision that allows this is Section 179 of the Internal Revenue Code, and so most people refer to the tax break as the Section 179 deduction. If you qualify for the deduction, it can save you a lot of money very quickly and is much easier to deal with than other rules for recovering the costs of business property.
Why is Section 179 treatment good?
The main benefit of Section 179 is that you get to deduct the cost of eligible property immediately. By contrast, most business property requires depreciation over the course of its useful life.
For instance, say you buy property worth $70,000 that would typically require straight-line depreciation over seven years. Without Section 179, you'd only be allowed to deduct $10,000 each year over the seven-year period. With Section 179, you get the full $70,000 deduction up front, giving you more immediate tax savings.
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What kinds of property qualify for Section 179?
To use Section 179, you must purchase property for business use that is depreciable and does not fall into one of the prohibited categories from the IRS. This includes tangible personal property, agricultural structures, storage facilities, computer software, and qualified real property that includes leasehold improvements, restaurant-related property, or improvements to retail real property.
Some types of property are specifically left out of Section 179. Land and land-based improvements like swimming pools or parking areas don't qualify, and in general, leased property or property used for lodging can't use Section 179. For a full explanation of what does and doesn't qualify, this IRS publication gives details.
What are the limits of Section 179?
The IRS imposes limits on Section 179 deductions. For 2017, you can deduct up to $500,000 using the Section 179 deduction, as long as you spend no more than $2 million on capital purchases for your business. If you spend more than that, you'll lose $1 in Section 179 deductions for every $1 above $2 million that you spend. For instance, if your capital spending was $2.1 million, then you could only deduct $400,000 using Section 179, because you were $100,000 over the $2 million limit.
How much will Section 179 save me in taxes?
The exact amount that you'll save using Section 179 depends on the amount of property you buy, your business income, and your tax bracket. However, the savings are often substantial and can dramatically reduce your tax liability. The calculator below can give you a sense of what you might be able to save.
Editor's note: The following language is provided by CalcXML, which built the calculator below.
* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.
For instance, say that you spend $100,000 on qualifying property. You'll get to deduct the entire $100,000, and if you're in the 35% tax bracket, that will save you $35,000 on your taxes. Effectively, you'll have been able to acquire $100,000 worth of property for just $65,000 after taxes.
For purchases above $500,000, you won't be able to deduct the full amount right away. However, you will be able to use regular depreciation on the excess, further reducing your after-tax cost and helping to produce tax savings for your business.
The way to think about the Section 179 deduction is that it gives you a tax break for purchases that you're likely to have needed to make anyway. By taking advantage of Section 179, you can avoid the need to do lengthy depreciation, both saving you money and hassle over the long run.
