Understanding IRS Section 179
Up to 100% Deduction for Software or Equipment Purchases
IRS Section 179 Deduction
The IRS Section 179 Deduction is ideal for small to medium-sized businesses. It allows businesses to write off equipment and software purchases as a tax incentive.
2019 IRS Section 179 At a Glance
The following is an overall, “simplified” view of the IRS Section 179 Deduction for 2019. For more details on limits and qualifying equipment, as well as IRS Section 179 Qualified Financing, please read this entire page carefully.
2019 DEDUCTION LIMIT
This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2019, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2019.
2019 SPENDING CAP
This is the maximum amount that can be spent on equipment before the IRS Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. This spending cap makes Section 179 a true “small business tax incentive”.
Bonus Depreciation is generally taken after the IRS Section 179 Spending Cap is reached.
Essentially, IRS Section 179 Works Like This
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it’s true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting over the next few years. That’s the whole purpose behind IRS Section 179 – to motivate the American economy (and your business) to move in a positive direction. For most small businesses, the entire cost can be written-off on the 2019 tax return (up to $1,000,000).
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Overview of IRS Section 179 Deduction
IRS Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
IRS Section 179 used to be referred to as the “SUV Tax Loophole” or the “Hummer Deduction” because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV’s and Hummers). But, that particular benefit has been substantially reduced in recent years.
Today, IRS Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps small businesses. Although large businesses also benefit from IRS Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses – and millions of small businesses are actually taking action and getting real benefits.
IRS Section 179 does come with limits – there are caps to the total amount written off ($1,00,000 for 2019), and limits to the total amount of the equipment purchased ($2,500,000 in 2019). The deduction begins to phase out dollar-for-dollar after $2,500,000 is spent by a given business, so this makes it a true small and medium-sized business deduction.
All businesses that purchase, finance, and/or lease less than $2,500,000 in new or used business equipment during tax year 2019 should qualify for the IRS Section 179 Deduction.
Most tangible goods including “off-the-shelf” software and business-use vehicles (restrictions apply) qualify for the IRS Section 179 Deduction. For basic guidelines on what property is covered under the IRS Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the IRS Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2019 and December 31, 2019.
The deduction begins to phase out if more than $2,500,000 of equipment is purchased – in fact, the deduction decreases on a dollar for dollar scale after that, making IRS Section 179 a deduction specifically for small and medium-sized businesses.
In 2019, bonus depreciation is being offered at 100%. The most important difference is both new and used equipment qualify for the IRS Section 179 Deduction (as long as the used equipment is “new to you”), while Bonus Depreciation covers new equipment only.
Bonus Depreciation is useful to very large businesses spending more than the IRS Section 179 Spending Cap (currently $2,500,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, IRS Section 179 is generally taken first, followed by Bonus Depreciation – unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the IRS Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for IRS Section 179.
The information provided on IRS Section 179 is informational only and not intended to express a legal view or replace your accounting professionals.
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