The Section 179 Deduction, is a deduction derived from the IRS tax code that allows businesses to deduct the full purchase price of qualifying equipment or software from their gross income. Costs for leasing qualifying equipment/software can also be deducted. Section179.org provides a comprehensive review of the Section 179 Deduction to include the following information:
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Basic Rules and Limits
The Section 179 Deduction is primarily geared towards small businesses. For the 2017 tax year (defined as beginning on January 1, 2017 and ending on December 31, 2017) the deduction limit is $500,000 and there is a Spending Cap of $2,000,000. After the $2,000,000 cap is reached, the deduction is reduced on a dollar for dollar basis and is not available to businesses spending more than $2.5 million on equipment in a given tax year.
Qualifying equipment must be purchased, financed or leased in the same tax year that the deduction is taken, and must be used more than 50% of the time for business purposes.
For the 2017 tax year, a bonus depreciation of 50% can be taken for new equipment costs.
The cost of used equipment can be deducted as long as the equipment is “new to you,” but does not qualify for the bonus depreciation.
In order to qualify for the Section 179 deduction, the property must be purchased and put to use during the tax year being claimed. Material goods that generally qualify include:
- Equipment (machines, etc) purchased for business use
- Tangible personal property used in business
- Business Vehicles with a gross vehicle weight in excess of 6,000 lbs
- Computer “Off-the-Shelf” Software
- Office Furniture
- Office Equipment
- Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)
- Partial Business Use (equipment that is purchased for business use and personal use: generally, your deduction will be based on the percentage of time you use the equipment for business purposes)
Qualifying software is software that is available to the general public that has not been custom-made and is put to use in the tax year being claimed. Websites are generally not eligible for the Section 179 deduction. Per Section179.org, the following conditions apply:
For basic eligibility, the software must meet all of the following general specifications:
- The software must be financed or purchased outright by you.
- The software must be used in your business for income-producing activity.
- The software must have a determinable useful life.
- The software must be expected to last more than one year.
In addition, these three specific stipulations must be met:
- The software must be readily available for purchase by the general public.
- The software must be subject to a non-exclusive license.
- The software must not have been substantially modified.
As noted on Section179.org, qualifying vehicles include those that are unlikely to be used for personal purposes and include the following:
- Heavy “non-SUV” vehicles with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area.) To give an example, many pickups with full-sized cargo beds will qualify (although some “extended cab” pickups may have beds that are too small to qualify).
- Vehicles that can seat nine-plus passengers behind the driver’s seat (i.e.: Hotel / Airport shuttle vans, etc.).
- Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a classic cargo van.
Costs of passenger vehicles, trucks and vans that do not meet the above conditions can be deducted if they are used more than 50% for a qualified business use with a total deduction for both expense and depreciation limited to $11,060 for cars and $11,160 for trucks.
More detailed information on qualifying vehicle deductions can be found here.
Non Qualifying Equipment
The following is a list compiled by Section179.org of property and equipment that generally does not qualify for the deduction:
- Real Property does not qualify for the Section 179 Deduction. Real Property is typically defined as land, buildings, permanent structures and the components of the permanent structures (including improvements). Other examples of property that would not qualify for the Section 179 Deduction include paved parking areas and fences.
- Air conditioning and heating equipment is generally not eligible for the Section 179 Deduction.
- Property used outside the United States generally does not qualify for the Section 179 Deduction.
- Property that is used to furnish lodging is generally not qualified for the Section 179 Deduction.
- Property acquired by gift or inheritance, as well as property purchased from related parties does not qualify for the Section 179 Deduction (No, you can’t sell equipment to yourself and qualify for Section 179).
- Any property that is not considered to be personal property, may not qualify for the Section 179 Deduction.
- Used Equipment (that is new to you) qualifies for Section 179, however used equipment does not qualify for Bonus Depreciation (if offered in a given tax year).
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