Section 179: Put the tax code to work for you
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Section 179 Deduction
Allows you to deduct the cost of qualifying equipment up to $1,040,000, rather than depreciating the cost over a period of several years. The maximum dollar amount of equipment you can purchase in any calendar year is $2,590,000 before the deduction is reduced dollar for dollar.
A 100% Bonus Depreciation can be taken on new and used equipment purchases, in addition to the Section 179 deduction.
Section 179 is an incentive many small to medium sized businesses use to provide 100% depreciation in the first year of use. Depreciation percentages and maximum dollar thresholds can potentially change from year to year. For 2020, you can deduct the cost of your equipment purchases up to $1,040,000. Plus, you can enjoy 100% Bonus Deprecation.*
Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses – and millions of small businesses are actually taking action and getting real benefits.
What is Section 179?
Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease using full purchase option) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income rather than the traditional amortization schedule deducted over the course of a five to seven year period. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
For example, if your company spends $50,000 on a machine, it gets to write off it off a little at a time through depreciation, say, $10,000 a year for five years, receiving the standard tax benefit on the depreciated amount each year. While that is better than no write-off at all, most business owners would actually prefer to write off the entire equipment purchase price for the year they buy it – and that’s exactly what Section 179 does; it allows your business to write off the entire purchase price of qualifying equipment for the current tax year.
This has made a big difference for many companies. Businesses have used Section 179 to purchase needed equipment right now, and receive all of the tax benefit now, instead of waiting. For most small businesses, the entire cost of qualifying equipment can be written-off on the 2020 tax return (up to $1,040,000).
All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2020 should qualify for the Section 179 deduction (assuming they spend less than $3,630,000).
Typical “over-the-road” tractor trailers and heavy construction equipment will qualify for the Section 179 deduction, as will forklifts and similar.
The equipment must be purchased or financed and placed into service between January 1, 2020 and December 31, 2020.
What amount is eligible?
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
Are there any limits?
Section 179 does come with limits – there are caps to the total amount written off ($1,040,000 for 2020), and limits to the total amount of the equipment purchased ($2,590,000 in 2020). The deduction begins to phase out on a dollar-for-dollar basis after $2,590,000 is spent by a given business, making it a true small and medium-sized business deduction.
What is Bonus Depreciation?
Unlike Section 179, Bonus Depreciation is offered some years, and some years it isn’t. Right now in 2020, it’s being offered at 100%. Bonus Depreciation is useful to very large businesses spending more than the Section 179 spending cap (currently $2,590,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
Cost Savings Example
|2020 Lift Truck Investment||$1,500,000|
|Section 179 Deduction||$1,040,000|
|100% Bonus Depreciation Deduction||$460,000|
|Total 2020 Deduction||$1,500,000|
|First-Year Tax Benefit (21% Tax Bracket)||$315,000|
|Net After Tax Cost of Equipment||$1,185,000|
Let us help you take advantage of these tax benefits. We’re here to offer the resources you need to find the right equipment for your needs while also helping you save money. Contact us to learn more.
*This information is provided for general reference only, contains a partial overview of certain sections of the Internal Revenue Code of 1986, as amended (the “Code”), and is not intended to be a detailed discussion of the depreciation rules or any other provision(s) of the Code. Nothing herein constitutes any tax, accounting or legal advice, and it cannot be used or relied upon to avoid any penalties that may be imposed under U.S. federal tax laws. You should consult your own independent tax, accounting and/or legal advisors for advice that is based upon your particular circumstances.