Understanding The Section 179 Tax Deduction

Business owners rely on functioning equipment to power their business and when that equipment becomes unreliable, your bottom line suffers. The Section 179 deduction makes it easier for businesses to upgrade their equipment and keep their business running smoothly by providing a tax deduction on the purchase price – so that hefty price tag doesn’t have to disrupt your business’s cash flow.  

Section 179 is a tax provision that allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. This deduction is particularly beneficial for small and medium-sized businesses, as it provides them with a significant tax incentive to invest in capital assets that can help grow their business.  

What is Section 179 Tax Deduction? 

The Section 179 tax deduction was created to stimulate business investment in equipment and technology. It allows businesses to deduct the full cost of qualifying assets from their taxable income, up to a specified limit. Unlike bonus depreciation, which spreads the cost of an asset over its useful life, Section 179 allows businesses to deduct the entire cost of the asset in the year it is placed into service. 

For 2024, the Section 179 amounts are as follows:  

• Businesses can take a total deduction of $1,160,000. 
• Businesses’ total equipment purchase limit is $2.89 million. 
• Businesses can apply 80% bonus depreciation on both new and used equipment for the entirety of 2024. 

Any business purchases below the $2.89 million limit will qualify for the deduction.  

Many business expenses qualify for the Section 179 deduction, if the purchase is a physical item – assets like patents, copyrights, or real estate don’t count. Business equipment purchases that are commonly used for Section 179 are: 

• Tools, equipment, or machinery  
• Computers, printers, or software 
• Office furniture 
• Vehicles 
• Improvements to business buildings (fire alarms, security systems, etc.) 

How to Use Section 179 

To take advantage of the Section 179 deduction, a business must purchase or finance qualifying assets and put them into service during the tax year.  

Businesses can choose to use the Section 179 deduction for new and used equipment if the assets are used for business purposes. Additionally, the deduction can be applied to assets purchased outright or financed through a lease or loan agreement. 

When filing taxes, businesses must complete IRS Form 4562 to claim the Section 179 deduction. This form allows businesses to report the details of the qualifying assets and calculate the deduction amount. The deducted amount is then applied to reduce the business’s taxable income for the year, resulting in lower overall tax liability. For questions, contact a tax professional or accountant to help you navigate the form and ensure you’re getting the biggest possible incentive.  

What about Leased Equipment? 

Leased or financed equipment is eligible for Section 179, but it depends on what type of lease you use: capital or operating. 

Capital lease: With a capital lease, you agree to buy the asset by the end of the contract. To use Section 179, you take the deduction for the cost of the asset when you sign the contract.  

Operating lease: In an operating lease, you are essentially renting the equipment and plan to return it to the lessor at the end of the contract. Section 179 doesn’t apply to this kind of lease, but you can deduct your monthly payments. 

Benefits of Section 179 Tax Deduction 

There are several key benefits associated with utilizing the Section 179 tax deduction: 

Immediate Tax Savings: By deducting the full cost of qualifying assets in the year of purchase, businesses can significantly reduce their taxable income and lower their tax liability. This can result in immediate tax savings that can be reinvested back into the business or used for other purposes. 

Cash Flow Management: The Section 179 deduction provides businesses with a valuable cash flow management tool. Rather than waiting to recoup the cost of an asset through depreciation deductions over several years, businesses can realize the tax benefits upfront, allowing them to preserve cash for other business expenses or investments. 

Encourages Investment: The availability of the Section 179 deduction incentivizes businesses to invest in capital assets that can improve productivity, efficiency, and competitiveness. By making it more affordable for businesses to acquire equipment and technology, Section 179 promotes economic growth and innovation. 

Simplicity and Flexibility: Unlike some other tax incentives, such as bonus depreciation, which may have complex eligibility requirements and limitations, Section 179 is relatively straightforward and flexible to use. Businesses have more control over which assets to deduct and can tailor their investment decisions to maximize tax savings. 

The Section 179 tax deduction is a valuable tool for businesses looking to invest in equipment and technology while reducing their tax burden. By allowing businesses to deduct the full cost of qualifying assets in the year of purchase, Section 179 provides immediate tax savings, improves cash flow management, and encourages investment in growth opportunities. Businesses should consult with tax professionals to determine eligibility and maximize the benefits of this tax provision. If you’re ready to upgrade equipment and invest in your business, but don’t have the cash on hand to do so, one of our lending partners can get you the cash you need to maximize your potential.