Section 179: What Every Business Owner Needs to Know About This Depreciation Deduction

Don't miss out on this valuable business depreciation deduction.

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Section 179 doesn’t increase the total amount small business owners can deduct, but it allows them to get their entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset’s useful life—which can be up to 39 years. This is called first-year expensing or Section 179 expensing. (Expensing is an accounting term that means currently deducting a long-term asset.)

Example: Ginger buys a $4,000 photocopy machine for her business. Under the regular depreciation rules (using the straight-line depreciation method), Ginger would have to deduct a portion of the cost each year over its five-year useful life as follows:

Year

Depreciation Deduction

2013

$400

2014

$800

2015

$800

2016

$800

2017

$800

2018

$400

By deducting the copier under Section 179 instead, Ginger can deduct the entire $4,000 expense from her income taxes in one year. So she gets a $4,000 deduction under Section 179 in the year she purchases the item, instead of the $400 deduction she gets using depreciation.

What Property Qualifies?

You qualify for the Section 179 deduction only if you buy long-term, tangible personal property that you use in your business more than 50% of the time.

Tangible Personal Property

Under Section 179, you can deduct the cost of tangible personal property (new or used) that you buy for your business if the IRS has determined that the property will last more than one year. Examples of tangible personal property include computers, business equipment and machinery, and office furniture. Although it’s not really tangible property, computer software can also be deducted under Section 179.

You can’t use Section 179 to deduct the cost of:

  • land
  • permanent structures attached to land, including buildings and their structural components, fences, swimming pools, or paved parking areas
  • inventory
  • intangible property such as patents, copyrights, and trademarks
  • property used outside the United States, or
  • air conditioning and heating units.

Property Used Primarily (51%) for Business

To deduct the cost of property under Section 179, you must use the property primarily for your business. The deduction is not available for property you use solely for personal purposes or to manage investments or otherwise produce nonbusiness income.

You can take a Section 179 deduction for property you use for both personal and business purposes, as long as you use it for business more than half of the time. The amount of your deduction is reduced by the percentage of your personal use. You’ll need to keep records showing your business use of the property. If you use an item for business less than half the time, you will have to use regular depreciation instead and deduct the cost of the item over several years.

There is another important limitation regarding the business use of property. You must use the property over half the time for business in the year in which you buy it. You can’t convert property you previously used for personal use to business use and claim a Section 179 deduction for the cost.

Property That You Purchase

You can use Section 179 expensing only for property that you purchase—not for leased property or property you inherit or receive as a gift. You also can’t use it for property that you buy from a relative or a corporation or an organization that you control. The property you purchase may be used or new.

Annual Deduction Limit

There is a limit on the total amount of business property expenses that you can deduct each year under Section 179. In an effort to stimulate a faltering economy, this limit was increased to $500,000 in 2010 though 2014. It is scheduled to go back down to $25,000 in 2015 unless Congress acts to extend it again which it has done for the last several years.

The annual deduction limit applies to all of your businesses combined, not to each business you own and run.

You don’t have to claim the full amount—it’s up to you to decide how much to deduct under Section 179. Whatever amount you don’t claim under Section 179 must be depreciated instead.

Because Section 179 is intended to help smaller businesses, there is also a limit on the total amount of Section 179 property you can purchase each year. You must reduce your Section 179 deduction by one dollar for every dollar your annual purchases exceed the applicable limit which is $2 million for 2014.

Business Profit Limitation

You can’t use Section 179 to deduct more in one year than your net taxable business income for the year. To figure out what this is, you subtract your business deductions from your business income. However, do not subtract your Section 179 deduction, the deduction for 50% of self-employment tax, or any net operating losses you are carrying back or forward.

If you have a net loss for the year, you get no Section 179 deduction for that year. If your net taxable income is less than the cost of the property you wish to deduct under Section 179, your deduction for the year is limited to the amount of your income. Any amount you cannot deduct in the current year, you can carry forward and deduct the next year (or any other year in the future).

 

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