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 1: $400; Year 2: $800; Year 3: $800; Year 4: $800; Year 5: $800; Year 6: $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.
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.
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:
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.
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.
Effective 2018, there is a $1 million limit on the total amount of business property expenses you can deduct each year under Section 179. When first enacted, the Section 179 annual limit was set at a relatively modest $10,000. Over the years, Congress kept raising the limit in an effort to help small businesses during tough economic times. In 2015, the annual limit was set at $500,000 and then it was raised to $1 million, effective 2018, under the Tax Cuts and Jobs Act.
Because Section 179 is intended to help small businesses, there is also a limit on the total amount of Section 179 property a business can purchase each year before a phase-out in the deduction begins. Under these rules, the amount you can deduct each year under Section 179 is reduced dollar for dollar by the amount your business investment purchases exceed the annual investment limit. The annual business investment limit is $2.5 million, starting in tax year 2018. Prior to that, the limit was set at $2 million in 2015.
The $1 million annual limit and $2.5 million maximum business investment limit are indexed for inflation each year starting in 2019. See Section 179 Tax Deduction Limits for more on Section 179 annual limits.
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. If all your business deductions (including Section 179) exceed your business income for the year, you can only deduct 80% of the loss starting in 2018.
In addition to Section 179, bonus deprecation can be used to currently deduct the cost of certain qualifying long-term business property. Unlike Section 179, there is no annual dollar limit on the amount you can deduct using bonus depreciation and you need not use the property at least 51% of the time for business. Starting in tax year 2018, the property does not need to be new to claim a bonus deduction. The property must be placed in service in the year the deduction is claimed. See Bonus Depreciation Extended Through 2026 for more information on how bonus depreciation works.