How to reduce taxable income with Section 179 tax deduction
5 min read
July 10, 2023 • Block Advisors
Section 179 deductions are advantageous to take as a small business owner because it offers helpful tax deductions to reduce your business’s overall taxable income. Read on to hear what they are, why they matter, and how to handle your Section 179 expensing in this post!
What is Section 179?
First, let’s answer “What is Section 179?” Section 179 of the Internal Revenue Code (IRC) was enacted to allow eligible businesses to immediately deduct the cost of qualifying purchases such as machinery and equipment. All businesses need equipment: whether it’s technology, office furniture, supplies, vehicles, machinery, or other tangible items.
Your business could purchase any number of these items throughout the year and may do so repeatedly. Section 179 allows you to elect to deduct the cost of these items.
Could Section 179 deductions be in your future?
Find out with the help of our Small Business-Certified tax pros
Section 179 changes
After 2017’s tax reform, two important Section 179 changes went into effect.
- Expense deduction and phaseout limits increased
- Eligible property for the expense changed
Read on to find out how Section 179 deductions work today.
Who qualifies for taking Section 179 deductions?
All business types (structures) are generally eligible for IRC Section 179 expensing, including:
- Sole proprietorships
What property qualifies for a Section 179 deduction?
Tangible personal property purchased for business purposes generally qualifies for the Section 179 deduction. The definition of eligible section 179 property was changed to allow certain improvements made to nonresidential real property such as roofs, and systems for heating, air conditioning, security, and fire protection.
Most types of business equipment that your business purchases and places in service during the tax year could qualify for the Section 179 deduction.
- Equipment and machinery
- Business vehicles (but the deduction may be limited – see below)
- Off-the-shelf computer software
- Office furniture and equipment
- Costs of certain improvements to business buildings
- Certain agricultural and storage structures
Section 179 business income limitations
The total amount you can deduct under Section 179 is subject to a dollar limit and a business income limit, each of which apply to the individual owner, not to the business entity. Section 179 business income limitations are as follows:
- The maximum deduction for Section 179 for 2023 is $1,160,000 of expenditures. The beginning phaseout starts at $2,890,000. These amounts adjust for inflation each year.
- More types of building improvements are allowed.
- The tax deduction is allowed for certain tangible personal property used to furnish lodging, such as furniture and appliances purchased for a furnished rental apartment.
The deduction is reduced dollar-for-dollar for qualified expenditures more than the beginning phaseout. For example, the Section 179 tax deduction for a business making qualifying purchases of $3.05 million would be $1 million [($1.16 million – ($3.05 million – $2.89 million))].
Here are the additional rules related to the Section 179 deduction:
- The deduction is limited to the amount of taxable income from an active trade or business. Any unused deduction may be carried over for an unlimited number of years.
- The deduction is pro-rated if business use is less than 100%; and is not allowed if business use is 50% or less.
- Vehicle expense deductions, including the Section 179 deduction, have separate limitations for the maximum amount of depreciation you can take. The overall limitation is based on these factors:
- If the vehicle is a car, truck, or van
- If you have chosen to take special or bonus depreciation
- The gross vehicle weight of the vehicle (read Section 179 Deduction: Does My Vehicle Qualify?)
- If the vehicle is bought or held for leasing by a business engaged in leasing passenger automobiles
After the first year, the balance of the qualifying vehicle’s cost depreciates at a different rate.
How to claim a Section 179 deduction
Here’s the process for taking the Section 179 deduction:
- Purchase qualified property and start using it during the tax year.
- Substantiate the financial records of each purchase, including the:
- Date of purchase
- Date you began using the property
- Associated costs of the purchase. Your tax pro can help identify all qualifying property.
- The Section 179 deduction is calculated and claimed on Form 4562, Depreciation and Amortization.
- Get help! Consult a Block Advisors certified small business tax pro to help you complete your small business tax return with the Section 179 election.
Get help with small business taxes
For a customized tax strategy, including how to maximize small business or self-employed tax deductions, turn to your Block Advisors certified tax pro.
You’ll be guaranteed a 100% accurate tax return. As your small business tax partner, we also offer bookkeeping and payroll services year-round so that we can manage more of what you need, and you can do more of what you love!