In the section 179 deduction, businesses can deduct the full purchase price of qualifying equipment and/or software purchased or leased during the tax year. This can provide a significant tax break for businesses of all sizes.
However, you may also find it helpful to know that businesses will still be able to depreciate 100% of the cost of any eligible equipment through the year 2022. Keep reading as we explain exactly what section 179 is, how it works and what you need to keep in mind for the upcoming tax season.
For those of you wondering about section updates, 2021 section 179 deductions did have an update. The maximum deduction amount increased to $1 million, and the phase-out threshold has increased to $2.5 million.
What Is the Section 179 Deduction?
If you’re wondering what the Section 179 deduction is, it is a depreciation deduction. It is a part of the United States Internal Revenue Code. This code actually allows taxpayers to elect to make any deductions of the cost of certain types of property on their income taxes as an actual expense. It does this instead of requiring the cost of that property to be capitalized and later depreciated.
The section 179 deduction was first introduced by Congress in 1984 as section 168(k) of the Internal Revenue Code (IRC). In simpler terms, it allowed businesses to deduct the entire purchase price of qualifying equipment purchased or leased during the tax year.
The original section applied only to certain depreciable assets that had a recovery period of 20 years or less. It rapidly became popular with small business owners because it provided an immediate reduction in taxable income.
Take a look at section 179’s progression. In 2002, section 179 was amended to include software purchased or leased during the tax year. The maximum deduction amount increased to $25,000. The phase-out threshold increased to $200,000.
In December 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act, which made several amendments to section 179. The maximum deduction amount increased to $500,000, and the phase-out threshold increased to $2 million.
Considering the potential need for tax preparation, let’s take a look at how section 179 works.
How Does Section 179 Work?
Essentially how it works is that it allows businesses to be able to take an immediate deduction for any business expenses, such as equipment purchases that are related to any depreciable asset. Some of those assets could be equipment, software, or even vehicles. This code allows businesses to be able to lower their current year tax liabilities instead of capitalizing an asset and having it depreciate over the next tax years.
If you’re wondering if you can claim Section 179, you can as long as you purchased, leased, or financed your equipment and placed it into service or an operational state by midnight of December 31st of that current year. It’s important to note that section 179 often changes from year to year.
Additionally, the section 179 deduction expanded to include improvements to nonresidential property, including roofs, heating, and air-conditioning systems, fire protection and alarm systems, and security systems. These changes were effective for tax years beginning in 2021.
Here’s What You Need For Tax Season
Keep this in mind for the upcoming tax season. The current deduction limit for the year 2021 is $1,050,000. What this basically means is that your company has the ability to make a deduction from the full cost of any qualifying equipment. It doesn’t matter if that equipment was new or used at the time of purchase.
The cost just cannot exceed $1,050,000 from your taxable income of the current year. Keep in mind that the deduction is fine until you reach 2.6 million in overall purchases for that year.
Many factors can help taxpayers determine whether to take the deduction and how much of the cost to deduct. For example, this deduction phases out dollar for dollar if total equipment costs exceed $2 million, and is not available at all for passenger vehicles.
In addition, when a taxpayer purchases more than $2.5 million in business equipment, the deduction decreases dollar for dollar over that amount – to zero at $3 million in equipment costs.
It’s important to note that these limits are only per entity/fiscal year and do not stack from year to year. In other words, if a business is purchasing more than $2 million in equipment this year it will not be able to take the full deduction, but rather will need to divide the cost between this year and next year.
Here’s What To Look For: Section 179 For The Upcoming Tax Season
Section 179 gives businesses more flexibility when they make a deduction. A bonus depreciation is usually used for expensing beyond the limit that section 179 provides. Keep in mind that section 179 will not be going away in the year 2022. However, there are a few things you want to remember about bonus deductions.
It will remain at 100% but you will, however, see a depreciation over the next 3 to 4 years. In 2023 you can expect Section 179 tax deductions and bonus depreciation to decrease to 80%. In 2024, it will decrease to 60% and so on.
Now you know that section 179 is another deduction tool that is available for businesses to be able to save on equipment costs and property purchases. The ability to make this claim is, however, limited to your taxable income. So, you can’t use it to create any losses or extend an existing loss.
Contact us for more information about buying equipment for your business.