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11/19/2019

Section 179: What you need to know about the small business tax deduction

Section 179 is a tax deduction that allows businesses to deduct the cost of certain assets as an expense in the tax year in which they are placed in service. See how taking advantage of this deduction can have a positive impact on your tax liability.

Is Section 179 Right for My Business?

Depending on your industry, you may need a state-of-the-art printer, an excavator or a full suite of gourmet kitchen equipment. Does it qualify? Find out in our previous post, What qualifies for Section 179.

To determine the best way to use Section 179, first ask, "Is my taxable income greater than the Section 179 expense?"

If the answer is yes, you should probably use Section 179, which allows you to fully expense only those purchases you want to — within the limits — while depreciating the rest using conventional depreciation methods. A caveat: Section 179 cannot result in a net loss

If no, you should take the 100% bonus depreciation deduction. Keep in mind that with this option, you cannot selectively choose and ALL capital acquisitions must be expensed in the current year.

Ultimately, whether you use the accelerated depreciation of Section 179, bonus depreciation, conventional depreciation or a combination depends on your situation. Read on for a couple of examples.

Section 179 vs. Bonus Depreciation

Small business owners may be eligible for the Section 179 deduction, the bonus depreciation deduction or a combination of both. Here are a couple of scenarios where we’ve simplified the “tax math” based on the maximum deduction limits for the cost of property purchased and where an effective tax rate of 21% is assumed.

Scenario 1 – You’ve purchased a piece of equipment for $250,000. This amount is below $1,020,000, so you would see a savings of $52,500 using the Section 179 tax deduction, effectively making your after-tax equipment cost $197,500 ($250,000 minus $52,500).

Scenario 2 – It’s been a big year, and you’ve decided to grow your business. You spend $3 million on equipment purchases and leases. Your Section 179 deduction is $570,000, calculated by subtracting the amount that your purchase of $3 million exceeds $2,550,000 ($450,000) from the maximum deduction of $1,020,000.

You then add this to your bonus depreciation deduction, which maxes out at $2,550,000.

Even though your total first-year depreciation is $3,200,000, your deduction cannot exceed 100 percent of the property purchased and placed in service – in this case, $3,000,000. Your cost savings is $630,000, effectively making your after-tax equipment cost $2,370,000

Didn’t follow the math on these examples? No worries! Just use our Section 179 calculator to estimate your own potential savings with Section 179.

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