Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying property and equipment purchased or financed during the tax year. This allows businesses to deduct the full cost of these assets in the year they are placed in service rather than deducting the cost over time through depreciation. Section 179 can provide substantial tax savings for businesses that are looking to invest in and expand their operations. In this post, we’ll break down everything you need to know about claiming the Section 179 deduction.
What is Section 179?
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service, up to an annual deduction limit. For 2022, the total Section 179 deduction limit is $1,080,000. This limit begins to phase out when more than $2,700,000 of equipment is placed in service during the year. The deduction is intended to provide an incentive for businesses to invest in equipment, machinery, vehicles, and other assets to grow their business.
Rather than depreciating qualifying purchases over 3-7 years, Section 179 allows the full cost to be deducted in year 1, providing an immediate tax benefit. The Section 179 deduction is available to all businesses, including sole proprietorships, partnerships, corporations, and S corporations.
What Property Qualifies for Section 179?
To qualify for Section 179, equipment must be purchased for business use and placed into service during the tax year. Qualifying property includes:
Machinery and equipment
Furniture and fixtures
Vehicles (limits apply)
Computers, phones, tablets
Software
Storage facilities like warehouses or distribution centers
Property must be new or “new to you.” Used equipment qualifies as long as it is your first use of the property. The equipment must be tangible - intangible assets like goodwill do not qualify. And real estate and buildings do not qualify.
Pro Tip: Purchase equipment at the end of the year to maximize the benefit of Section 179. Assets placed in service in January qualify for the deduction in that tax year.
How Does the Deduction Phase Out?
The Section 179 deduction begins to phase out once a business places more than $2,700,000 in service during the year. The phase out threshold is indexed to inflation and changes each year.
For every $1 over the limit, the maximum deduction decreases by $1. Once over $3,800,000 of equipment is placed in service, no Section 179 deduction is allowed.
Example: XYZ Corp purchases $2 million of equipment during 2022. They can deduct the full $1,080,000 under Section 179. If they purchase $3.5 million of equipment, the deduction phases out as follows:
$3,500,000 - $2,700,000 = $800,000 over the limit. The deduction decreases by $1 for every $1 over, so it is reduced by $800,000. Their maximum Section 179 deduction would be $280,000.
Planning purchases and maximizing the deduction threshold can optimize Section 179 tax savings.
Does My Business Qualify for Section 179?
Section 179 deductions are available to all businesses, regardless of legal structure. Sole proprietors, partnerships, corporations, and S corporations can all claim the Section 179 deduction. The equipment must be purchased for business use, not personal use.
Specific business categories that qualify:
Manufacturing
Construction
Engineering
Technology
Retail and ecommerce
Transportation
Real estate
Healthcare
Media and marketing
If you operate as a sole proprietor or partnership, the Section 179 deduction is claimed directly on your personal tax return. S corporations and corporations claim the deduction on the business tax return and it passes through to owners’ personal returns.
Pro Tip: Companies that lease equipment can also qualify for Section 179. Talk to your leasing agent about structuring payments to optimize tax deductions.
How to Claim Section 179 on Your Taxes
To claim Section 179, you’ll complete IRS Form 4562 Depreciation and Amortization and attach it to your business tax return. Simply follow these steps:
Determine which assets were placed in service during the tax year and qualify for the deduction. Compile invoices, purchase paperwork, and payment confirmation.
Calculate the total cost of qualifying equipment and make sure it falls below the phase-out thresholds.
On Form 4562, enter the total cost of qualifying equipment on line 2. This is the amount you elect to deduct under Section 179.
Enter the applicable deduction limit, $1,080,000 for 2022, on line 3.
Calculate the tentative deduction by comparing the amounts on lines 2 and 3. It is the lesser of the cost or the deduction limit.
Complete Part 2 to confirm that business income limits don’t apply. Most small businesses can deduct the full amount.
Carry the final Section 179 deduction amount to your tax return.
Pro Tip: Work with your tax preparer to adjust your estimated quarterly tax payments to maximize cash flow from the Section 179 deduction.
Section 179 Deduction Example
ABC Company is a small ecommerce business that sells sporting goods online. In 2022, they earned $1.5 million in gross revenue from online sales.
To expand their warehouse and technology infrastructure, ABC Company purchased the following equipment in 2022:
$300,000 of new conveyor systems, racks, and forklifts for their warehouse
$350,000 worth of new computers, laptops, and tablets for their office staff
$50,000 of new desks, chairs, and office furniture
The total cost of this new equipment was $700,000. Since this amount is below the 2022 Section 179 phase-out threshold of $2.7 million, ABC Company can deduct the full $700,000 as a Section 179 deduction for 2022.
Without the Section 179 deduction, ABC Company would have had to depreciate the equipment over 5-7 years. But with the Section 179 deduction, they can deduct the full $700,000 in year 1.
For 2022 taxes, ABC Company's financials are:
Gross revenue: $1.5 million
Section 179 deduction: $700,000
Taxable business income before 179 deduction: $500,000 (Revenue of $1.5M minus $1M in business expenses)
Taxable income after 179 deduction: $200,000
Estimated tax savings from Section 179 deduction: $140,000 - $210,000
Gross Revenue | $1,500,000 |
Taxable business income before 179 deduction. (Revenue of $1.5M minus $600k in business expenses) | $900,000 |
Section 179 Deduction | $700,000 |
Taxable income after 179 deduction | $200,000 |
Estimated tax savings from Section 179 deduction | $147,000 |
By using the Section 179 deduction, ABC Company was able to lower their taxable income by $500,000 for 2022 taxes, saving an estimated $147,000 on their business income taxes. This deduction provided an immediate tax benefit versus slowing depreciating the assets over 5-7 years.
Section 179 Questions and Answers
Here are some common Section 179 questions and answers:
Does the equipment have to be new?
No, equipment can be new or used, as long as it is the first use by your business.
When should I purchase equipment to qualify for Section 179?
Purchase equipment by December 31 to qualify for that tax year’s deduction.
If I finance equipment, can I still qualify for Section 179?
Yes, as long as the equipment is placed in service during the tax year, the way it is financed does not matter.
Do I have to claim the full deduction in one year?
No, you can take a partial Section 179 deduction and depreciate the remaining basis.
Can I deduct installation costs?
Yes, costs for equipment installation qualify for Section 179.
Does software qualify for Section 179?
Yes, software purchased for business use qualifies. Exceptions include software that is already deducted or amortized elsewhere.
Can I deduct vehicles?
Business vehicles with a gross vehicle weight up to 14,000 lbs qualify, up to the luxury limits.
Conclusion and Next Steps For Section 179 Tax Deduction
The Section 179 deduction can provide substantial tax savings for businesses investing in equipment, machinery, software, and other assets. To maximize the potential deduction and tax benefit for your business, it is critical to understand the qualification rules, limits, and how to properly claim the deduction on your taxes.
We hope this overview has provided useful information to help you utilize Section 179. The next step is to put this into action for your 2022 taxes. Connect with one of our business tax experts at United Tax to determine if your recent purchases qualify for Section 179. Our team can ensure you claim every allowable deduction and credit to minimize your tax liability. Contact us today to get started!
