When it comes to running a business, every penny counts. One way to save money on your taxes is through the section 179 depreciation deduction. This deduction allows businesses to deduct the full purchase price of qualifying equipment and/or software that was purchased or financed during the tax year.
What is Depreciation
Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. Tangible assets include buildings, equipment, vehicles, and machinery, among other things. Depreciation is an important concept in accounting because it helps companies to accurately represent the decline in the value of their assets over time.
What is Section 179?
Section 179 of the Internal Revenue Code (IRC) was created to encourage businesses to invest in themselves by providing tax incentives for purchasing new or used business equipment. This tax code allows businesses to deduct the cost of qualifying equipment and/or software in the year it is purchased instead of depreciating it over several years.
What qualifies for Section 179?
Not all equipment and software purchases qualify for the Section 179 deduction. The equipment must be tangible property and used primarily for business purposes. This can include, but is not limited to:
- Machinery and equipment
- Vehicles (over 6,000 pounds)
- Computers and software
- Office furniture and fixtures
- Property attached to the building (i.e., heating and cooling systems)
It is important to note that the property must be purchased and placed in service during the tax year in which the deduction is being claimed.
Examples of Vehicles over 6,000 pounds potentially eligible for Section 179
- Ford F-150 Raptor SuperCab or SuperCrewCab
- Chevrolet Silverado 2500HD or 3500HD
- Ram 2500 or 3500
- GMC Sierra 2500HD or 3500HD
- Ford Expedition
- Chevrolet Suburban
- GMC Yukon XL
- Cadillac Escalade ESV
- Ford Transit Cargo Van
- Mercedes-Benz Sprinter Cargo Van
- Chevrolet Express Cargo Van
- GMC Savana Cargo Van
It’s important to note that not all versions of these vehicles may qualify for the Section 179 deduction, as it depends on the specific weight and use of the vehicle. Additionally, other factors may come into play, so it’s always best to consult with a tax professional to ensure eligibility for the deduction.
What are the limits for Section 179?
While the Section 179 deduction can be a valuable tax break, there are limits to how much can be deducted. For the 2022 tax year, the maximum deduction is $1,050,000, with a phase-out threshold of $2,620,000. This means that if a business purchases more than $2,620,000 in qualifying property, the deduction will be reduced dollar-for-dollar until it is fully phased out.
Additionally, the total amount of Section 179 deductions claimed cannot exceed the business’s taxable income for the year. However, any unused deduction can be carried forward to future years.
It’s also important to note that the Section 179 deduction can only be claimed if the business has taxable income for the year. If the business has a net loss for the year, the deduction cannot be claimed but can be carried forward to future years.
How to claim Section 179?
To claim the Section 179 deduction, businesses need to file IRS Form 4562 with their tax return. This form details the equipment or software purchased and how much is being deducted.
It’s important to consult with a tax professional to ensure that you qualify for the deduction and are claiming it correctly. Additionally, some states may not conform to the federal Section 179 deduction, so it’s important to understand the specific tax laws in your state.
In conclusion, the Section 179 depreciation deduction can be a valuable tax break for businesses that purchase qualifying equipment and software. It allows businesses to deduct the full purchase price in the year it is purchased instead of depreciating it over several years. However, it’s important to understand the limits and rules surrounding the deduction to ensure it is being claimed correctly and to maximize the tax savings for your business.
For more about depreciation, check out this article: