Section 179: What It Is and How It Can Help Your Business

A Simple Guide to Section 179: What It Is and How It Can Help Your Business

If you’re a small business owner and you aren’t fully benefitting from Section 179 of the IRS Code, then this guide is for you. Section 179 is a valuable tax break that allows you to deduct the full cost of certain business equipment and property in the same year you buy it—no need to spread the deductions out over several years. This can be a great way to reduce your taxable income and save money on your taxes, but it’s important to understand how it works and the rules around it.

What is Section 179?

In simple terms, Section 179 allows your business to write off the entire purchase price of qualifying equipment or software in the year you buy it, rather than depreciating it over several years. This can include everything from computers and office furniture to machinery, vehicles, and certain types of software.

For the 2024 tax year, businesses can deduct up to $1.22 million, as long as total purchases don’t exceed $3.05 million. If your business buys more than $3.05 million in qualifying property, the deduction starts to phase out. This deduction is meant to help businesses save money upfront, encouraging reinvestment in equipment and technology that can help grow your company.

The Pros of Section 179

1. Instant Tax SavingsThe biggest benefit of Section 179 is the immediate tax deduction. Instead of spreading the deduction over several years, you can deduct the entire cost of the purchase in the same year. This reduces your taxable income for the year, which means you’ll pay less in taxes. More cash flow for your business!
2. Helps Your Business GrowSection 179 encourages you to invest in equipment that can help your business run more efficiently or be more competitive. Whether you’re upgrading your technology, adding a new vehicle, or purchasing tools, this deduction can make it easier to invest in your business without taking a big hit at tax time.
3. Wide Range of Eligible ItemsA lot of business equipment qualifies for this deduction. You may be able to deduct the cost of computers, office furniture, machinery, vehicles, and even certain types of software. If it’s used for business purposes, it likely qualifies.
4. No Need for Long-Term DepreciationNormally, you’d have to spread out the cost of equipment over several years, taking smaller deductions each year. With Section 179, you can take the full deduction in the year you make the purchase, which can be a huge help for businesses that need to save money quickly.

The Cons of Section 179

1. There Are LimitsWhile Section 179 offers a great deduction, there are limits. In 2024, you can deduct up to $1.22 million, but if your total purchases for the year exceed $3.05 million, the deduction starts to phase out. Larger businesses with big capital expenditures may hit these limits quickly.
2. Must Be Used Within the YearOne of the key rules to remember is that the equipment has to be purchased and put into service by December 31 of the tax year. If you buy something in December but don’t start using it until January, you won’t be able to deduct it for that year. Planning ahead and acting before the year ends is critical to taking advantage of this deduction.
3. Not All Purchases QualifySection 179 doesn’t apply to everything. For example, land and buildings don’t qualify, nor do certain types of intangible assets like patents or trademarks. Be sure to check whether what you’re buying qualifies before making the purchase.
4. Can’t Create a LossThe deduction can only reduce your taxable income to zero, not below. If your Section 179 deductions exceed your income, you can’t use the extra deductions to create a tax loss. However, you may be able to carry forward any unused deduction to future years.

Bottom Line

Section 179 is a great way for small businesses to save on taxes and reinvest in their growth, but it’s important to be aware of the rules. The most important thing to keep in mind is that the deduction applies only to property purchased and placed in service by the end of the calendar year. Make sure to act before December 31, and check with a tax professional to ensure you’re maximizing your benefits.

Section 179 can be a game-changer for your business if you know how to use it. With a little planning, you can turn a big purchase into big tax savings.