How Does the IRS Section 179 Work?
The tax code is long and tends to be complicating if you don't understand which sections apply to your financial situation or how they are calculated.
The same applies for the Section 179 deduction.
The purpose of Section 179 in the tax code is to give businesses the opportunity to deduct the entire price of software and equipment purchased during the eligible tax year instead of write-offs through depreciation.
It is designed to encourage businesses to invest in themselves and receive a tax break in exchange for doing so.
Section 179 was referred to as a "Hummer Deduction" or "SUV Tax Loophole" because it originally allowed businesses to write off the purchase price of vehicles.
Since it was originally introduced, this particular benefit of Section 179 has been drastically reduced to prevent exploitation.
Section 179 is one of the very few pieces of legislation included in a recently passed stimulus bills to benefit the small business owner.
Large businesses can also benefit from it, but the original target and purpose was to give small business owners a much-needed tax break.
It helps to understand exactly how the tax code works with a real-life example.
When a small business buys a piece of equipment or other need for the business, it can write the cost of the purchase off in small increments through depreciation.
This is beneficial, but it can take years to recoup the full investment cost.
With Section 179, small businesses can write off the full purchase price in the same year that they buy it.
This part of the tax code encourages small business owners to upgrade equipment and software since they know that they can receive the full amount in deductions for the year that the purchase was made.
This helps both the business owner and stimulates the overall economy.
There are limits to Section 179 to prevent abuse and ensure that it functions the way it was originally intended.
The total amount that can be written off is limited to $500,000 for 2013, and the total purchase price cannot exceed $2,000,000.
The deduction still applies beyond $2,000,000, but it phases out on a dollar-for-dollar basis.
This ensures that the benefit truly does help the small and medium business owners as originally intended.
Large businesses benefit in another way since they can take a bonus depreciation of 50 percent on any amounts that exceed the $2,000,000 threshold.
Any business that buys, leases or finances less than $2,000,000 in either used or new equipment during the tax year is eligible to benefit from Section 179.
If the business is unprofitable for the year and doesn't produce any taxable income, they can still benefit by using the purchase for a future year's tax benefit when the business earns a profit.
Qualifying purchases must be put into service and used in the business at some point between January 1st and December 31st of the tax year to count for the deduction.
Most goods qualify for the deduction including machines, personal property used in the business, business vehicles, computers, software, office furniture and equipment.
It's important to differentiate between the bonus deprecation and Section 179.
Bonus depreciation can only apply to purchases of new equipment, while Section 179 applies as long as the purchase is new for you.
It's generally recommended to take the Section 179 deduction followed by bonus depreciation.
Any vehicle, software and equipment must be used for business purposes at least 50 percent of the time to qualify to receive benefits from Section 179, and the write-off is a the overall cost multiplied by the amount of use for business.
The same applies for the Section 179 deduction.
The purpose of Section 179 in the tax code is to give businesses the opportunity to deduct the entire price of software and equipment purchased during the eligible tax year instead of write-offs through depreciation.
It is designed to encourage businesses to invest in themselves and receive a tax break in exchange for doing so.
Section 179 was referred to as a "Hummer Deduction" or "SUV Tax Loophole" because it originally allowed businesses to write off the purchase price of vehicles.
Since it was originally introduced, this particular benefit of Section 179 has been drastically reduced to prevent exploitation.
Section 179 is one of the very few pieces of legislation included in a recently passed stimulus bills to benefit the small business owner.
Large businesses can also benefit from it, but the original target and purpose was to give small business owners a much-needed tax break.
It helps to understand exactly how the tax code works with a real-life example.
When a small business buys a piece of equipment or other need for the business, it can write the cost of the purchase off in small increments through depreciation.
This is beneficial, but it can take years to recoup the full investment cost.
With Section 179, small businesses can write off the full purchase price in the same year that they buy it.
This part of the tax code encourages small business owners to upgrade equipment and software since they know that they can receive the full amount in deductions for the year that the purchase was made.
This helps both the business owner and stimulates the overall economy.
There are limits to Section 179 to prevent abuse and ensure that it functions the way it was originally intended.
The total amount that can be written off is limited to $500,000 for 2013, and the total purchase price cannot exceed $2,000,000.
The deduction still applies beyond $2,000,000, but it phases out on a dollar-for-dollar basis.
This ensures that the benefit truly does help the small and medium business owners as originally intended.
Large businesses benefit in another way since they can take a bonus depreciation of 50 percent on any amounts that exceed the $2,000,000 threshold.
Any business that buys, leases or finances less than $2,000,000 in either used or new equipment during the tax year is eligible to benefit from Section 179.
If the business is unprofitable for the year and doesn't produce any taxable income, they can still benefit by using the purchase for a future year's tax benefit when the business earns a profit.
Qualifying purchases must be put into service and used in the business at some point between January 1st and December 31st of the tax year to count for the deduction.
Most goods qualify for the deduction including machines, personal property used in the business, business vehicles, computers, software, office furniture and equipment.
It's important to differentiate between the bonus deprecation and Section 179.
Bonus depreciation can only apply to purchases of new equipment, while Section 179 applies as long as the purchase is new for you.
It's generally recommended to take the Section 179 deduction followed by bonus depreciation.
Any vehicle, software and equipment must be used for business purposes at least 50 percent of the time to qualify to receive benefits from Section 179, and the write-off is a the overall cost multiplied by the amount of use for business.
