The difference between using Section 179 and depreciation is that Section 179 gives you immediate tax savings in the first year so that you can invest it back into your business. Meanwhile, depreciating equipment like vehicles over a few years can give you more money back but over a longer timeframe.
When cash flow is strong and you don’t see anything causing disruptions in the next few years, depreciation can be better than Section 179, as you’ll keep more of your money in the long run and reduce your overall tax bill. The opposite is true in situations where you need to replace vehicles or machinery and also need to cover immediate costs sooner rather than later.
Here’s how Section 179 and depreciation work in a few situations and why you may want to choose one over the other.
You Need Cash Now vs. Later
If you need cash sooner than later to purchase supplies or pay bills that you delayed because you had to replace costly equipment, Section 179 makes more sense than depreciation because you’ll have more cash after taxes to get your operations going again.
By paying less taxes this year, you can use the funds to pay bills, payroll, or acquire the supplies you held off on purchasing. If you go with depreciation, you’ll have less money after taxes this year to acquire supplies and pay debts, making it harder to keep your business afloat. If cash flow is lacking because you bought equipment or machinery this year, Section 179 will give you more money after taxes to help get you back on your feet.
Cash Flow Is Strong and You Want to Expand
When your goal is to expand your business, including new locations, a larger warehouse or retail store, or new product lines, Section 179 and depreciation can each play a role in setting you up for success.
If you’re opening one new location each year for the next few years and the net profit from your current business can fund the first new location, go with depreciation over Section 179. This way, as you open your third location in two years you’ll have the net profit from your current business and extra cash flow after taxes from the second business to help open the third location.
When it is going to cost more for utilities, rent, property taxes, and payroll (since you have multiple locations now), both Section 179 and depreciation can make sense. In the event cash flow is strong, using depreciation can give you more money back each year. Having this reliable financial cushion each year can help you invest in what is working and get your now-larger business profitable.
Meanwhile, using the same example, if you have to buy equipment or machinery for the new locations and want to offset these large expenses as much as possible, Section 179 can help you maximize your purchases and minimize costs for that single year.
You Need to Replace Equipment Now and in Three Years
Both depreciation and Section 179 can apply to your future planning. In this example, let’s imagine you own a farm.
On your farm, you have a vital piece of machinery, and its manufacturer releases an upgraded model every five years. This new model is being released in three years and will make your farm run more efficiently, increasing your profitability. All of the sudden, your current model breaks and is not repairable. You now have to lease a used or new machine, and you have to make a decision regarding whether or not you can afford the new model that’s coming out in three years.
If cash flow is strong and you can afford to lease or buy a used piece of machinery temporarily, and you can afford upkeep and unexpected repairs, go with depreciation as you’ll keep more of your money in the long run. By using depreciation instead of the Section 179 deduction, you have more cash to pay for the new equipment in three years as long as you set aside the money saved from depreciation each year.
Meanwhile, if cash is tight and you think you need more money available in the event repairs are needed on your leased used equipment, the immediate tax savings and freed-up funds from Section 179 can help you maintain the used equipment until you can buy the new model when it comes out in three years. Section 179 may be smarter than depreciation in this situation, as you’ll have the money on hand to maintain the temporary equipment until you can purchase the new model.
Section 179 and depreciation both get you money back after taxes. Knowing when to choose one over the other depends on your cash flow situation as well as your immediate and long-term goals.
About the Author
Kelly Hillock
Kelly Hillock is the content marketing manager for SmallBusinessLoans, where she writes and edits articles for small business owners. Kelly has over eight years’ experience in copywriting across a variety of industries, focusing on entrepreneurship and finance. She has a Bachelor of Arts in journalism from San Diego State University.
