The Section 179 Tax Deduction has been a boon for small and midsized businesses since it was introduced as part of a stimulus package in 2008. This deduction encourages business owners to make capital investments by allowing them to deduct up to the full purchase price of machinery purchased and put into service during the tax year.
Quick glance at Section 179
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 instead of capitalizing and depreciating assets over the year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. Though large companies can also benefit from section 179, it was mainly established to strengthen small and medium-sized companies' financial ability to invest on equipment.
Important things about Section 179 Deduction:
The limit on section 179 deductions changes from year to year, and for 2017 the limits are the highest yet.
- 2016 Deduction Limit = $500,000
This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2016, and the equipment must be financed/purchased and put into place by the end of the day, 12/31/2016.
- 2016 Spending Cap on equipment purchases = $2,000,000
This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. This spending cap makes Section 179 a true "small business tax incentive".
- Bonus Depreciation: 50% for 2016
Bonus Depreciation is generally taken after the Section 179 Spending Cap is reached. Note: Bonus Depreciation is available for new equipment only.
Who qualifies for the Section 179 Deduction?
All businesses that purchase, finance, and/or lease less than $2,000,000 in new or used business equipment during tax year 2017 should qualify for the Section 179 Deduction.
Most tangible goods including "off-the-shelf" software and business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2017 and December 31, 2016. Equipment must also be used at least 50% for business purposes.
Difference between Section 179 and Bonus Depreciation
Section 179 can be used both on used or new equipment but bonus depreciation can be only used on new equipment. Normally, bonus depreciation is used after you hit the limit of $500,000, unless you have no more taxable profit .
Example of Section 179 and Bonus Depreciation
New equipment purchase: $1,100,000
Section 179 Deduction: $500,000
Bonus depreciation:$600,000 x 50%=$300,000
Straight-line depreciation for the first year after bonus depreciation (20% in each of five years on remaining amount): $300,000 x 20%=$60,000
Total tax savings: $860,000 x 35%(tax rate)=$30,100
We hope this gives you a good a idea what to expect when you jump into upgrading or adding equipment to your business. Check out our website for complete listing of all the machinery available for this incentive or call us at 312-226-4305!!