What is the Section 179 deduction?
Recently made a vehicle or equipment purchase for your business? Heard about Section 179 or simply looking for possible deductions for your purchase?
Section 179 is one tax deduction you’ll want to learn about.
IRS Section 179 allows business owners to deduct either a portion or the full price of qualifying equipment, including vehicles and software, either purchased or financed during that tax year.
It’s one of the single best tax deductions available to business owners as it essentially allows you take the portion of depreciation you’d deduct each year and deduct the entire amount the same tax year that you purchased the piece of equipment.
Section 179 was originally created by the U.S. government to encourage businesses to invest in themselves and spur growth, and it helps you do just that.
What is the Section 179 deduction limit for 2020?
The Section 179 deduction limit has historically been different each year. However, fortunately for business owners, a recent bill was passed that will solidify the deduction every year from the 2019 tax year and on.
The Section 179 limits and guidelines for 2020 are as follows:
2019 Tax year deduction limit: $1,000,000
The 2019 Section 179 deduction limit applies for both new and used equipment as well as software purchases.
The equipment to be deducted must have been placed into service for the business between January 1st, 2019 to December 31st, 2019.
2019 Tax year spending cap: $2,500,000
The Section 179 spending cap is intended to put a limit on the total amount that a business can deduct with the tax code.
After spending $2,500,000 on equipment purchases, the amount your business can deduct using Section 179 is reduced, with a hard cap at $3,500,000 in equipment purchases.
What qualifies as Section 179?
After viewing the deduction limits and spending cap on Section 179, it might sound extremely attractive, but how do you know if a purchase you made in 2019 qualifies?
In general, your business should qualify for the Section 179 deduction if you purchased or financed equipment for business use in 2019.
Most types of business equipment qualify for Section 179, even software bought off-the-shelf, assuming you used it from the beginning to the end of the tax year. In this case, January 1st, 2019 to December 31st, 2019.
Keep in mind that you must have used the piece(s) of equipment you’d like to deduct 50% of the time or more for business purposes for those pieces of equipment to qualify under Section 179.
If you made an equipment purchase that you don’t use for business reasons 100% of the time, such as a supply van that you occasionally use for personal errands, calculate what percent of its use is for business purposes and you’ll get the dollar amount you can deduct on your taxes.
For example, if you paid $35,000 on the purchase of the vehicle and you use the vehicle for business 90% of the time, you can deduct $31,500 of the value with Section 179.
Do vehicles qualify for Section 179?
Yes! Vehicles qualify for Section 179.
In the past, the Section 179 tax rule abused by business owners to purchase SUVs and Hummers then deduct large portions of the purchase through a loophole, aptly referred to as the “SUV Tax Loophole”
As a result, further changes restricted vehicle deductions. However, Section 179 is still a powerful deduction you can utilize for business vehicle purchases, provided the vehicle itself qualifies.
Here are the types of vehicles that qualify for Section 179:
- Most heavy-duty construction vehicles
- Forklifts
- “Over-the-road” tractor-trailers
- Shuttle vans and other vehicles that can seat 9 or more passengers behind the passenger seat
Also, vehicles with these three properties:
- Fully-enclosed cargo area
- No seating behind the driver area
- And classic cargo vans and other vehicles that have no front body section that protrudes more than 30 inches in front of the leading edge of the windshield.
With these guidelines, virtually every business vehicle qualifies for Section 179, so it remains a useful deduction for business owners who have made a vehicle purchase or lease for business use in 2019.
Section 179 Example
Steve owns a construction business in Northern California. He invested in several new pieces of construction equipment for his business in 2019, totaling $1,400,000.
Section 179 for tax year 2019 has a first-year bonus depreciation of 100%, which allows him to deduct the additional $400,000 above the initial $1,000,000 for a 100% tax deduction.
As a result, his total deduction breaks down as follows:
- Lease price: $1,400,000
- Deduction: $1,000,000
- Bonus first-year depreciation for 2019 tax year (100%): $400,000
- Total deduction: $1,400,000
- Total tax savings (Assuming 35% tax rate): $490,000
Get the most from this tax season
With the Section 179 deduction, you get the maximum return immediately for equipment purchases made during a tax year, so you can reinvest that money to grow your business further.
It’s a useful tax code that means both huge savings and more flexibility for business owners who need and want to invest in equipment that can help them grow their business in a way that is maximally cost-effective.
Make the most of IRS Section 179 so that you can focus on growing your business. And while you’re at it, check out our other tax-related guides:
