The Section 179 deduction is a very valuable tax break for small and medium-sized businesses. This deduction allows business owners to deduct the full cost of large business expenses. Expenses like furniture, equipment, and machinery in one single tax season offer significant and more immediate financial relief on necessary expenditures.
With any tax rule, the government can change the provisions of the 179 deductions over time. Learn about Section 179 and updates for the 2021 tax season in this article.
What’s the Section 179 Tax Deduction About?
Usually, when you buy business equipment, you aren’t allowed to deduct the entire purchase in a single tax filing season. As an alternative, you would need to spread the deduction over the expected life of the asset (which is determined by the IRS). This is called depreciation.
Here’s an example, since the IRS classifies tractors as three-year property, so if you bought one for $60,000, you could only deduct $20,000 per year for three years using the depreciation system.
Business owners can instead, via Section 179 equipment deduction, deduct the full purchase price of that tractor from your taxes within one tax filing year. You can buy, finance, or lease qualifying equipment, vehicles, and/or software, and then take a full tax deduction this year.”
Which Purchases Are Eligible?
Some business purchases do not qualify for the Section 179 tax deduction. This tax break only applies to physical items — intangible assets like patents and copyrights aren’t eligible. Additionally, you cannot use the Section 179 deduction for buying land and real estate.
Aside from these restrictions, most other business equipment and asset purchases would be eligible. Purchases like the following:
- Machinery, tools and equipment
- Office furniture
- Computers, software, printers and other computer equipment
- Vehicles
- Smartphones
- Improvements to business buildings as well as installing fire alarms, roofing and security systems are good for this deduction.
Personal Use Rules
The IRS has additional rules for equipment that could allow you to them personally as well as for business like laptops and cellphones. To claim the Section 179 deduction for these items, 50% of the time they must be used for business as well.
The IRS also limits the size of the potential deduction for cars and trucks used for business and personal needs. You are only allowed to claim $11,160 upfront and save the rest of the deduction for another year. Vehicles that aren’t used for personal needs like cargo vans, tractor-trailers, and heavy construction equipment, can be claimed at 100% of the purchase price under the 179 deduction.
Section 179 and Leased Equipment?
The Section 179 deduction can be applied if you finance your investment through a lease. There are two (2) types of lease and the deduction works differently for both of them.
- Capital lease: These are basically a rent-to-own assests. With capital leases, you can take the 179 deduction for the cost of the asset when you sign the contract. This is a great way to turbocharge your tax breaks because you can immediately deduct the full cost of the asset while only paying for part of it. For example, you can lease a $90,000 bulldozer with a three-year agreement, committing to three installments of $30,000, but deduct the $90,000 right away.
- Operating lease: In an operating lease, you’re only renting the equipment with the plan to give it back at the end of the contract. You can’t use the Section 179 deduction for these leases and can only deduct your monthly payments, so they’re less tax effective.
How Has the Section 179 Deduction Changed in 2021?
The good news is there weren’t too many changes from 2020 to 2021! In a nutshell:
- Businesses can take a total deduction of $1,050,000, which is $10,000 higher than in 2020.
- Businesses’ total equipment purchase limit is $2.62 million (increased from $2.59 million in 2020).
- Businesses can apply 100% bonus depreciation on both new and used equipment for the entirety of 2021.
If you keep your spending at or below the $2.62 million limit, your eligible purchases will qualify. Remember the deduction begins to phase out dollar-for-dollar after that limit is reached and ends at the $3.67 million mark.
If you find that you are getting close to the limit, maybe postpone any additional purchases until 2022 so you stay eligible.
How Does Bonus Depreciation Factor In?
Business owners can also deduct business purchases another way called Bonus depreciation
Quick Overview of Bonus Depreciation
- No annual limit on deductions: This deduction isn’t limited to cost, a stark difference between Section 179 and bonus depreciation. You can deduct your entire investment no matter how much you spend per year.
- Can be larger than your business income: While a Section 179 deduction cannot be larger than your annual business income, bonus depreciation does not have this restriction. You can carry any unused deduction forward as a future tax break.
- Less flexible, must apply to all assets: Unlike the Section 179 deduction, bonus depreciation must apply to 100% of an asset’s cost and all assets must be in the same category. If you use bonus depreciation for one 10-year asset, you’ll need to use it for all 10-year assets bought that year. Bonus depreciation is also more lucrative in 2021. Before, you could only deduct 50% of an asset’s cost upfront using this break. Now, you can claim 100% of the cost.
The 100% deduction applies to purchases made in 2021 and 2022 and will start to decrease each year until it hits 20% in 2025. So, if you have any major equipment purchases and want to capitalize on bonus depreciation, consider acting sooner rather than later.
What Comes Next?
Using the Section 179 Deduction is a benefit for organization. If you are planning on making major business purchases and you own your own business location, consider a commercial property refinance loan from a direct lender.
You can also visit the Section 179 Deduction SBRN site for more information.