What is the Section 179 Deduction?
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. That means that if you buy, lease or finance a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the US Government to encourage businesses to buy equipment.
2024 Equipment Purchases |
$ |
1,300,000 |
|---|---|---|
First Year Write Off: |
$ | 1,220,000 |
60% Bonus First Year Depreciation: |
$ | 48,000 |
Normal First Year Depreciation: |
$ | 0 |
Total First Year Deduction: |
$ | 1,268,000 |
Potential Tax Savings: |
$ | 443,800 |
Equipment Cost after Tax: |
$ | 856,200 |
Section 179 works like this...
When your business buys certain pieces 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 vehicle, it gets to write off $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 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. That's the whole purpose behind Section 179. See the table to the right for an example of the savings that could be available to you.
Limits of Section 179
Section 179 does come with limits – there are caps to the total amount written off ($1,220,000 for 2024), and limits to the total amount of the equipment purchased ($3,050,000 in 2024). The deduction begins to phase out on a dollar-for-dollar basis after $3,050,000 is spent by a given business (thus, the entire deduction goes away once $4,270,000 in purchases is reached), so this makes it a true small and medium-sized business deduction.
Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2024 should qualify for the Section 179 Deduction (assuming they spend less than $4,270,000).
Most tangible goods used by businesses, including “off-the-shelf” software and business-use vehicles (restrictions apply, see next page) qualify for the Section 179 Deduction.
Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2024 and December 31, 2024.
What’s the difference between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn’t. Right now in 2024, it’s being offered at 60%.
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is “new to you”), while Bonus Depreciation has only covered new equipment only until the most recent tax law passed. In a switch from recent years, the bonus depreciation now includes used equipment.
Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $3,050,000) 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, 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.
Section 179’s “More Than 50 Percent Business-Use” Requirement
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the 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 Section 179.
Vehicles and Section 179
One of the more popular uses of the Section 179 Deduction has been for vehicles. As a potent tool for businesses, Section 179, often referred to as the “Hummer Tax Loophole,” provides substantial tax benefits upon the purchase of business vehicles. Although the particulars have evolved over time, Section 179 continues to yield valuable deductions on business vehicle acquisitions.
Diving Deeper into Vehicle Deduction Categories
It’s critical to comprehend that Section 179 does not treat all vehicles equally. Let’s scrutinize the two primary categories:
1. Work-Use-Only Vehicles
These vehicles are unlikely to be used for personal purposes by their very nature and typically qualify for a full Section 179 deduction. Work-use-only vehicles include:
- Transport vehicles like shuttle vans with seating for nine-plus passengers behind the driver’s seat.
- Classic cargo vans with a fully enclosed driver’s compartment/cargo area, no seating behind the driver’s seat, and no body section extending more than 30 inches ahead of the windshield’s leading edge.
- Heavy equipment such as construction machinery, farm tractors, skid steers, forklifts, and more.
- Over-the-road Tractor Trailers.
- Special-purpose business vehicles, like ambulances and hearses, typically qualify for a full deduction if they are not used for personal purposes.
2. Partial Deduction Vehicles (Trucks and SUVs Over 6,000lbs GVWR)
Trucks and SUVs exceeding 6,000 lbs. GVWR (Gross Vehicle Weight Rating) may qualify for a partial deduction if the vehicle is primarily used for business purposes. The exact deduction limit can vary, making it advisable to consult your tax professional regarding specific makes and models.
Key considerations for this category include:
- Pickup trucks with a full-size (8-foot) cargo bed generally qualify for a deduction equivalent to the percentage of their business use. For example, if you purchase a $60,000 truck used 85% for business, your deduction would be 85% of $60,000, or $51,000.
- Heavy SUVs also qualify based on business-use percentages but are subject to a $30,500 maximum deduction cap for 2024. Contrary to common perception, businesses cannot write off the entire cost of an SUV unless it is at or under the $30,500 cap.
Update / IRS Guidelines for Vehicles
As stated earlier, the vagueness of business vs. personal use can be complicated. To help, please refer to page 6 of these Instructions for Form 2106 to read the exact IRS language. For complete IRS information on Depreciation and Amortization, see Instructions for Form 4562.
Used Vehicles Qualify for the Section 179 Deduction
Vehicles can be new or used (“new to you” is the key). The vehicle must be acquired in an “arms-length” transaction, financed with certain qualified leases and loans, and titled in the company name (not in the company owner’s name).
The vehicle must also be used for business at least 50% of the time – and these depreciation limits are reduced by the corresponding % of personal use if the vehicle is used for business less than 100% of the time.
Remember, you can only claim Section 179 in the tax year that the vehicle is “placed in service” – meaning when the vehicle is ready and available – even if you’re not using the vehicle. Further, a vehicle first used for personal purposes doesn’t qualify in a later year if its purpose changes to business.
How to take the Section 179 Deduction
To elect to take the Section 179 Deduction, simply fill out Part 1 of IRS form 4562 and attach it to your tax return (much like any other additional form, such as a "Schedule C" or similar.)
This information is intended to be an illustration of a potential Section 179 deduction. Please consult a tax professional to determine Section 179’s applicability to your business.