Over the past few years due to certain amendments to it, the Section 179 federal tax deduction has become a highly useful federal tax deduction available to businesses allowing them to accelerate the deduction acquisition costs of certain business assets. In fact, as a result of amendments beginning in 2008, Section 179 has been one of small businesses’ most valuable tax planning tools. The changes to 179 were created to incentivize businesses to invest in themselves. Small and mid-size businesses are in the best position to realize the value of this deduction; however, the Section 179 election is also available to independent contractors, sole proprietors, partnerships and corporations.
The Stimulus Act of 2008 and its subsequent extensions (for a full list of the changes and updates to 179, visit here) adjusted Section 179 to offer generous deductions to businesses for their asset purchases and in some cases even bonus deductions. Many small businesses took full advantage of this provision, saving tax money that businesses could then spend on hiring more employees and towards further growth.
How Section 179 Works
Section 179 allows businesses to deduct the entire cost of certain assets in the year of purchase. Beginning in 2008, Congress altered the limits depending on the incentives Congress deemed necessary to stimulate the economy. Since 2010, the deduction maximum has been $500,000, subject to a $2 million limit on purchases. The $2 million dollar limit was enacted to ensure that only small and midsize businesses qualify for the deduction.
Importantly, in 2014 those maximum deduction and limitation amounts were set to expire and the maximum deduction was planned to revert back to its original limit of $25,000, with a $200,000 limitation on purchases. Obviously, if the reversion occurs the advantages of Section 179 would be almost completely eliminated. Unless Congress passes another extension or revision, the accelerated deduction will be unavailable for the 2014 tax year.
Section 179 is most important as an acceleration to depreciation. When a business buys assets for use in its business, it can write off the purchase price incrementally over a number of years using depreciation based upon the applicable rules for each asset. Importantly, the 179 Election trumps these depreciation rules and allows businesses to write off the entire purchase price for the year the equipment is purchased. Thereby encouraging businesses to purchase equipment as they can write off the entire amount in the year of purchase – hopefully stimulating the economy by incentivizing equipment purchases.
Section 179 Qualifying Property
Section 179 is aimed at general business assets and applies to most types of asset purchases, as well as to off-the-shelf software. The deduction applies to the purchase of new or used assets. As long as the asset is used in your business in the year of purchase, you can likely deduct the cost in that tax year. Qualifying purchases include:
- 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 lbs.
- Computer "Off-the-Shelf" Software
- Office Furniture and Equipment
- Property attached to your building that is not a structural component of the building such as large manufacturing tools and equipment
The equipment must be used for business purposes more than 50% of the time in that year to qualify for the Section 179 Deduction. The percentage that the asset is actually used for business is the percentage of the purchase price eligible for the deduction. For example, if the equipment is used for business 70% of the time, 70% of the purchase price is eligible for deduction; however, because of the 50% rule, if the equipment is used for business 40% of the time, none of the purchase price is eligible for the deduction. If the asset is used entirely for business purposes, the entire purchase price is eligible for deduction.
Limitations on Section 179
In addition to the limitations explained above, the deduction is limited to a business’s aggregate income for that year from the business’s active trade or business income. However, any amount that cannot be deducted in the year for this reason, can be carried over to the next year. For instance, if a business’s aggregate income is $100,000 for the year, it could deduct up to $100,000 (under the old limitations) of 179 qualifying purchases and any amount exceeding the $100,000 could be carried over to offset the next year’s income.
As of the date of this post, it is unclear whether the deduction will actually revert to the $25,000 limit, or whether Congress will pass a measure extending the $500,000 limit or another limit of its choosing. A House Ways and Means Committee member recently introduced a bill that would restore Section 179 to 2013 levels. In addition, the law would adjust levels for inflation each year and make the changes retroactive for all of 2014. In April, the Senate Finance Committee approved a bill that would extend deductions into 2015.
Making the deduction permanent would work to promote business investment and economic growth and reduce uncertainty created by having a temporary tax law that needs to be renewed periodically.
Meanwhile, small businesses should consider this potential change as they wait in limbo for Congress to make decisions on this issue that could have major monetary implications for them. We may need to wait for the 2014 fall elections to conclude before Congress takes any action, but it is certainly something to keep on your radar during election season.
For more information on the 179 deduction rules, please visit http://www.section179.org/index.html.