At tax time, small businesses generally look for ways to maximize their deductions. One underused provision of the Internal Revenue Code (IRC) which can help is Section 179. This section, when applied correctly, can translate to tax savings for you. Additionally, The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) signed into law in December of 2015 affected tax year 2016 and beyond and provided significant further expansions to the Section 179 deduction.
What is Section 179?
Basically, IRC Section 179 is a provision that allows businesses to deduct the cost of certain types of property in one year, rather than requiring the cost to be capitalized and depreciated over time.
How Does Section 179 Help?
In a nutshell, Section 179 allows businesses to save through the use of “first year expensing” for business equipment. It doesn’t actually increase the total amount you can deduct for a business asset, but instead allows you to claim the entire depreciation deduction in one year rather than taking it in small chunks over time. This can result in tax savings for you.
What Qualifies as Section 179 Property?
Under Section 179, if your business purchased equipment during the tax year and you used the equipment more than 50% of the time for business, that equipment may qualify for a Section 179 deduction. The equipment must be “long term” equipment, expected to last more than a year.
In general, the following types of equipment can be considered Section 179 Property:
- Business vehicles
- Computers and laptops
- “Off-the-shelf” computer software
- Office furniture and equipment
- Property attached to your building that is not a structural component of the building
The Path Act also expanded the definition of Section 179 property to include portable air conditioning and heating units, whether for human comfort or business purposes and, the portion of an HVAC system that is air conditioning or heating property used for a business purpose, or for human comfort, placed in service after December 31, 2015.
If you want to claim property that is used only part of the time for business, the deduction will be based upon the percentage of time you use the equipment or item for business. For instance, if you buy a sewing machine and use it 70 % of the time for business purposes, and 30 % of the time for personal use, you will only be permitted to deduct 70 % of the cost of the sewing machine.
What’s Excluded from a Section 179 Deduction?
There are certain types of property that you cannot claim under Section 179. These include:
- Permanent structures and structural components
- Business inventory
- Property outside the United States
- Property that is leased, inherited or received as a gift.
- Intangible property (i.e. copyrights, patents and trademarks)
How Much Can You Deduct Under Section 179?
The Path Act extended the annual Section 179 deduction limit to $500,000 for qualifying purchases during the per year. This deduction is phased-out dollar-for-dollar for businesses with purchases of qualifying Section 179 property of $2 million and completely eliminated above $2.5 million. Additionally, Congress made these Section 179 limits permanent, indexing for inflation in years beginning after Dec. 31, 2015.
Further, you can’t use Section 179 to deduct more in one year than your net taxable business income for the year. Therefore, if your business has a net loss for the year, you cannot claim a 179 property deduction. In the same way, the amount of the deduction will be limited to the amount of your income. However, you may be able to carry the deduction forward to a subsequent year.
Overall, if you are a small business owner looking for additional tax breaks, Section 179 can work to your advantage. If you have any doubt as to whether property should be included as 179 Property make sure to check with your tax professional.
Posted in: Tax Law