The Section 179 Tax Deduction Explained

Businesses are always trying to find new ways to reduce their taxable income. One of the tax deductions that is becoming more popular is the Section 179 tax deduction. Maybe you have excess cash on hand to purchase fixed assets, but maybe not. If you are low on cash, you can easily finance equipment purchases through Capital for Business, allowing you to take advantage of the Section 179 depreciation deduction.

What is the Section 179 Tax Deduction?

The Section 179 tax deduction allows businesses to deduct the full cost of assets in the year they are placed in service. Generally, business assets are depreciated over the useful life, which can range from 3 years to 27.5 years. However, with the Section 179 tax deduction, businesses can immediately expense the asset to reduce their taxable income.

Common business assets include software, machinery, equipment, office furniture, office fixtures, and leasehold improvements. It is important to note that the purchase of a building is not a qualifying asset for the Section 179 expense.

How Does the Section 179 Tax Deduction Work?

The Section 179 tax deduction is limited to $1,050,000 for 2021, phasing out dollar for dollar for asset purchases over $2,620,000. Let’s say you purchase $2,720,000 in assets for the year. You would only be allowed to take a maximum deduction of $950,000 with the rest of the assets being depreciated over the useful life. Since the phase-out limit is so high, most businesses will not encounter that issue.

Further limitations appear in the taxable income the business has for the year. The Section 179 deduction cannot create a loss, meaning the deduction amount is limited to the company’s taxable income. If your business purchases $100,000 in assets during the year, but you only have $50,000 of taxable income, you would only be eligible for a Section 179 deduction up to $50,000.

What Information Do I Need to Have?

There are a few pieces of information that will be required to be filed on the tax return when you claim the Section 179 deduction. The date placed in service, cost, description, and useful life are all required information. This information can easily be found on an invoice. Keep in mind that qualifying assets are based on the date placed in service.

If you purchase an asset on December 15, 2021, but don’t place the asset in service until January 1, 2022, you would not be allowed to take any deduction for 2021. Instead, the Section 179 deduction would be available for 2022 for that specific asset.

How Can the Section 179 Tax Deduction Help Me?

There are a few different benefits Section 179 can provide for your business. The first benefit is improved tax planning. Section 179 can help you reduce your taxable income, making it a great planning strategy. If you have a large amount of taxable income for the year and excess cash on hand, consider purchasing assets for your company.

Even if you don’t have the cash on hand, there are plenty of equipment financing companies that can work with you to help you purchase the assets your business needs. Reinvesting money is one of the top ways to effectively grow your business.

How Do I Claim the Section 179 Tax Deduction?

The Section 179 depreciation deduction is claimed on the tax return. This deduction is available for rentals and businesses. Once you determine you are eligible to take the deduction, you will fill out Form 4562 to claim the deduction. All of the other assets that are being depreciated according to their useful lives will be found here as well.

On a business return, the deduction will flow through to Schedule K, but on an individual return, the deduction will be listed on the Schedule C or Schedule E. Most tax return software automatically calculates the limitations, taking any guessing out of the calculation.