What Is a Section 179 Deduction?

A Section 179 expense is an expense that can be deducted immediately from taxable income as opposed to being depreciated over time.

The U.S. tax code’s Section 179 designates a sizable group of important purchases. The whole value of which may be deducted from taxable income for tax purposes in the year that the purchases are put into service.

Computers, office furniture, and commercial software are examples of items of business equipment covered by Section 179. Generally speaking, real estate is not covered. The federal government has limited how much businesses can write off for vehicles that are typically used for personal transportation. However other vehicles, such as cargo vans, are still eligible for expenses.

Another point to keep in mind is that many costs are instantly deductible. Regardless of whether they fall under Section 179 when calculating business costs for tax purposes. Rent, office supplies, insurance, and a portion of beginning costs are among them.

Contrarily, it primarily addresses assets that will continue to be valuable once you start utilizing them. This is opposed to those that would otherwise be gradually written off over the duration of their useful lives.

What Kinds of Costs Fall Under Section 179?

It only applies to corporate income, not to personal income. It doesn’t matter if you purchased a piece of equipment the previous year.

Yet, since many people earn money from their businesses through ventures like consulting or freelancing, it applies to a large number of households.

Depending on the nature of your business and how you utilize the equipment, other products may be covered by Section 179. But before you rely on a Section 179 deduction, there are some expense categories that you should carefully analyze.

What Are the Section 179 Limitations for 2022?

The restrictions are lower than they will be for the 2023 tax year, so keep that in mind as you get ready to submit your business taxes for the 2022 tax year.

The maximum deduction for 2022 (taxes due in 2023) is $1,080,000. At around $2,700,000, the tax benefit starts to diminish gradually. Special restrictions apply to one notable category as well. In the 2022 tax year, the cost of a sport utility vehicle that can be written off under Section 179 cannot be higher than $27,000.

What Are the 2023 Cap Amounts?

The maximum deduction for the 2023 tax year (taxes due in 2024) is $1,160,000. There is a cap on the total amount of qualified equipment that can be purchased while still qualifying for a deduction. However, a business may combine different expenses to arrive at that sum.

Your maximum deduction starts to decrease if you put into service more than $2,890,000 in property that would qualify for a deduction under Section 179.

What Types of Automobiles Are Covered by Section 179’s “Hummer Tax Deduction”?

Previously, Section 179 was affectionately known as the “Hummer tax deduction“. This is because some business owners could use the substantial amount of allowable expenses to purchase pricey trucks.

As only cars weighing less than 6,000 pounds are eligible for Section 179 deductions, many expensive cars would have tax implications. Yet, because huge Vehicles might be heavy, these regulations did not apply to them. The lower limit for SUVs is now a part of Section 179 because of this.

Is Real Estate Covered by Section 179?

In general, it does not apply to real estate purchases. You might have to rely on depreciation if you purchased a new headquarters for your company to benefit financially from the purchase.

According to the IRS, land improvements including “swimming pools, paved parking lots, wharves, docks, bridges, and gates” are also ineligible.

According to the IRS, there are a few unique forms of property that can be eligible as a Section 179 expense.

  • Property that is mostly used as a hotel.
  • Systems for fire detection and defense.
  • Security apparatus.
  • Property that provides heating, cooling, and ventilation.

What Happens if You’re Not Eligible?

Beginning with the 2023 tax year, businesses will start to place more emphasis on Section 179. As tax laws extending the instant deductibility of other company purchases are being phased out.

The Tax Cuts and Jobs Act permitted “bonus depreciation,” a practice, to grow for several years. People may use bonus depreciation to immediately write off qualified assets through the 2022 tax year. It operates like Section 179, except it covers a larger range of costs.

The percentage of a qualified item that can be deducted in the year you begin utilizing it decreases to 80% in 2023. Every year it will get smaller until it is zero in 2027.

The fact that there are no significant changes planned for typical company deductions, including office supplies, may provide some solace.

Nevertheless, if you’re buying something that is more of a company asset and isn’t covered by Section 179, it’s possible that you won’t be able to immediately deduct some business expenses.

If you have any more questions, contact Your Part Time Accountant right away.