Section 179 of the IRS tax code allows businesses to deduct the price of machinery, equipment, and qualified real property during the tax year. In other words, a business can deduct the entire purchase price of the equipment from its gross income in the year that the equipment was bought or leased. This allows businesses to reduce tax liability for the current year rather than acquiring an asset and depreciating it over time in future tax years.
Limits of Section 179
Although Section 179 of the Internal Revenue Code provides significant tax reduction for small and mid-size businesses, these deductions are limited.
- Equipment, vehicles, and software purchased must be used for business purposes more than 50% of the time to qualify for the deduction
- For the 2020 tax year, the maximum deduction that is permitted to be written off is $1,040,000.
- Note: This limits the maximum amount of equipment purchased to $2,590,000
- The deduction phases out a dollar for each dollar spent above the $2,590,000
- Note: The maximum a business can purchase in equipment is $3,630,000 if it wishes to take any advantage of the deduction
Qualified Real Property that Can Apply
Under Section 179, businesses are now permitted to deduct certain types of real property. This includes:
- Qualified Improvement Property (improvements made to a building’s interior)
- Note: Improvements do not qualify if they were made for:
- The enlargement of the building
- Any elevator/escalator
- The internal structural framework of the building
- Note: Improvements do not qualify if they were made for:
- Roofs, HVAC, fire protection systems, alarm systems, and security systems
Going Further with Bonus Depreciation
Not only can businesses take advantage of maximizing deductions under Section 179, but the Tax Cuts and Jobs Act allows businesses to depreciate 100% of qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023.
Certain types of property, however, are not eligible for bonus depreciation in any taxable year beginning after December 31, 2017. This includes qualified property primarily used in the trade or business of:
- Electrical energy, water or sewage disposal services
- Gas or steam through a local distribution system, or
- Transportation of gas or steam by pipeline
By: Jacob Joseph, Law Clerk- 27Sep20
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