Editor's note: This post was originally published on December 24, 2021, and has been revised for clarity and comprehensiveness.
To quote Benjamin Franklin, there are two constants in life: taxes and death. But since we can’t accurately predict when or how we die, we’re left to muddle through our taxes (though, sometimes, taxes are their own guessing game!).
Luckily, since taxes are a human invention, the tax code has multiple sections that can ensure you get benefits for your company.
One of these beneficial regulations is Section 179.
As a Managed Security Services Provider (MSSP) with multiple business expenses and managing equipment procurement for our clients, we’re intimately familiar with Section 179. In this article, we’ll answer common questions such as:
By the end of this article, you’ll have a solid grasp of Section 179 and understand how to use it to your advantage.
What is Section 179?
Section 179 is a tax code section that allows businesses to deduct the total cost of equipment they bought during the year from their taxable income.
In short, it’s tax relief.
Instead of deducting a small portion of the asset’s depreciated value throughout the years, you can get the entire tax write-off in one go.
Small businesses benefit the most from Section 179, but larger companies can also use it for tax relief.
Its main goal is to encourage companies to invest in their improvement, and if you’ve spent less than $4,270,000 on equipment, you’ll benefit from this write-off.
Key Facts and Limitations of Section 179
Here are the quick facts and limitations you should know about Section 179:
1. All businesses that buy, finance, or lease new or used equipment qualify for Section 179 deduction.
If you spend less than $4,270,000 for equipment, you can qualify for the Section 179 Deduction, provided the equipment is used primarily for business purposes. This applies to a wide range of assets, including machinery, software, and vehicles, even if they are second-hand.
2. The equipment must be used for business tasks more than 50% of the time.
Oddly enough, Section 179 was known as the “Hummer Loophole”. Some CEOs claimed these Hummers were heavy equipment for the business and took advantage of Section 179 to deduct the cost from their taxes.
That’s why businesses must now use all equipment purchases strictly for company tasks.
But let’s say you’ve bought a sports vehicle for your business and use it more than 50% of the time. Then, you can deduct up to $30,500 for it.
3. If the equipment is “new to you,” you can deduct it from your taxes.
It doesn’t matter if the equipment is second-hand. If it came into your business as new equipment, it’s considered for the Section 179 deduction.
4. You can write off up to $1,220,000 from your gross income.
Whatever equipment you buy and use within the fiscal year, you can directly deduct up to $1,220,000 from your gross income, equivalent to the value of your purchases in your tax rate.
For example, you bought $1,020,000 worth of equipment for your business and are in the 35% tax bracket. You’ll get $357,000 off your taxes, and if the $357,000 saved in paying taxes were applied 100% to this equipment, the net cost for your $1,020,000 purchase would be $663,000.
The amount deductible also varies yearly, as the US government adjusts it based on factors such as the cost of living. For example, in 2023, the deductible amount was $1,120,000.
5. Your deductible lessens dollar-per-dollar if you spend over $3,050,000 on new equipment.
Let’s say you’ve spent $3,050,000 on new equipment, supplies, and software for your business. You’re exactly at the right threshold for deducting the full $1,220,000 from your taxes.
But, if you spend more than $3,050,000, you’ll get less and less tax relief per dollar spent. So, if you spend $3,060,000 instead of $1,220,000 off your taxes, you’re capped at $1,210,000.
If you spend over $4,270,000, you no longer qualify for the Section 179 write-off.
This limitation aligns with Section 179’s primary goal of helping small to medium-sized businesses (SMBs) invest in their growth.
Larger enterprises need to take advantage of bonus depreciation instead.
Luckily for SMBs, the government still allows small businesses to use bonus depreciation to their advantage.
6. You can deduct 60% of the equipment’s 1st-year depreciation cost as a bonus depreciation cost.
Bonus depreciation is a separate benefit from what’s laid out in Section 179. It’s another kind of tax write-off declared at the government’s discretion. It works in tandem with Section 179 and is another benefit you should know about.
Businesses can rely on 60% bonus depreciation in 2024, but the allowable percentage will steadily go down until 2026.
For example, you spent $2,000,000 in 2024 on equipment. You can deduct $1,220,000 from your gross income and declare the remaining $468,000 as a bonus depreciation expense.
Your total deduction is $1,688,000.
Ready to Save Money on Your Equipment?
Every business wants to save on taxes, and Section 179 is one of the critical sections in the IRS tax code that helps you do that.
Section 179 is a tax deduction meant to help businesses invest in themselves. Instead of paying the taxes back to the state, you can give your business relief and focus on growing your business.
The top things business should know about the Section 179 deduction are:
- All companies that buy, finance, or lease new or used equipment qualify for Section 179 deduction.
- You can remove up to $1,220,000 from your total gross income.
- You can deduct 60% of the equipment’s 1st-year depreciation cost as a bonus depreciation cost.
- You can deduct secondhand equipment from your taxes as long as the equipment is new to you.
Tax deductions are one of many ways to save money on your equipment. You can also save money in your business through other means, such as proactive IT.
Ready to maximize your tax savings with Section 179? Contact our team for a free consultation, and let us help you identify the best strategies to lower your equipment costs through smart tax planning.
Or, if you want to continue your research about cutting company costs, read:
- 4 Ways Proactive IT Maintenance Saves You Money
- How Much Does It Cost to Outsource IT?
- IT Cost Calculator [Free Tool]