There’s a lot of information out there about Section 179, but the most important thing to know is that it exists to help you. It was created as part of several economic stimulus bills to encourage businesses to invest in capital equipment.
What is Section 179?
Section 179 is part of the Internal Revenue’s Tax code, and it allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year (subject to limitations). That means if you buy or lease a piece of qualifying equipment, you can deduct the full purchase price from your gross income.
But how does it work, exactly?
When a business buys or leases certain types of equipment, it typically gets to write them off a little at a time through depreciation. Section 179 allows businesses to write off the entire purchase price the year they buy it (subject to limitations). This encourages businesses to buy or lease as much equipment as possible until they reach the limit on equipment purchases.
There’s a limit?
An equipment purchaser or lessee can deduct up to $25,000 from their tax burden. After $25,000, a bonus depreciation rate of 50 percent kicks in, and there is a $200,000 cap on the Section 179 deduction. After that, the deduction available begins to be reduced.
Can you clarify that?
If a company purchases or leases equipment for $25,000 it is allowed to write off that purchase in the first year. At an assumed 35 percent tax bracket, the Section 179 deduction would save the company $8,750. You can find a Section 179 savings calculator by visiting http://www.section179.org/section_179_calculator.html
What equipment qualifies for a Section 179 Deduction?
Most equipment that businesses purchase or lease will qualify for the deduction including “off-the-shelf” software. Here are some of the types of equipment that qualify:
- Equipment (machines, etc) purchased for business use
- Tangible personal property used in business
- Business Vehicles with a gross vehicle weight in excess of 6,000 pounds
- Computers
- Computer “Off-the-Shelf” Software
- Office Furniture
- Office Equipment
- Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools, etc.)
- Partial Business Use (equipment that is purchased for business use and personal use:
Generally, your deduction will be based on the percentage of time you use the equipment for business purposes.
Can I buy or lease multiple pieces of equipment under Section 179?
Yes. Section 179 was created to stimulate this kind of investment. However, there is a cap on purchases. The amount of equipment purchased or leased cannot exceed $200,000. For purchases over $200,000, the deduction is reduced, but a first year bonus depreciation kicks in at a rate of 50 percent.
Does the purchase date impact the deduction?
Yes. The Section 179 deduction only applies to equipment purchased in that tax year. To receive the deduction in 2014 you must purchase or lease equipment from Jan. 1, 2014 and Dec. 31, 2014.
What else do I need to know?
Make sure you have a conversation with your tax preparer, and he or she will need to fill out part one of IRS form 4562. That’s it.