Are you still contemplating on buying that equipment for your business? It may be good to know that there is the Section 179 deduction that can provide additional tax savings from qualified capital expenses. But before you get too excited, here’s what you need to know before you take advantage of this 100% deduction for your business purchases. 

What is Section 179 Deduction? 

The Section 179 deduction allows businesses to fully deduct the purchase price of qualifying properties in the year they were acquired instead of recovering their cost over time through depreciation. 

The immediate expense granted by the Section 179 deduction lowers a business taxable income for the year, reduces the overall tax liability, and ultimately provides significant tax savings. It is the government’s way to help and encourage businesses to invest in capital properties that can promote their overall business growth and profitability.  

What Properties May Qualify? 

In general, properties expected to provide benefits or service to a business for a period longer than one year may be subject to the Section 179 deduction. Machinery, equipment, office furniture, appliances, vehicles (subject to limitations), off-the-shelf computer software, and livestock are just some of the properties that may be eligible for this deduction. However, they must meet the following requirements to qualify: 

• Must be acquired for your business trade. Income-generating assets such as rental properties (unless it is your business trade), bonds, dividends, and royalties do not qualify. If the property is not exclusively used for business purposes, you may still use the Section 179 deduction only if the business percentage use of the property is more than 50%. 
• Must be acquired by purchase. Properties acquired as gifts, donations, or inheritance do not qualify for the section 179 deduction. Also, if you purchased a qualifying property from a related person or entities, you cannot use the Section 179 deduction.  

The properties do not have to be brand new and fully paid to elect the Section 179 deduction. Even if it is a pre-used property or was acquired through financing, you can still use this deduction if it was purchased and placed in business in the same year you are filing them as an immediate deduction. 

Real Properties and Section 179 Deduction 

Generally, the Section 179 deduction does not apply to real properties such as land, buildings, and land improvements. Land, to begin with, is not subject to depreciation. Land improvements such as swimming pools, parking areas, wharves, docks, bridges, and fences do not qualify according to the Internal Revenue Service (IRS). 

Buildings also do not qualify for this deduction. However, for the following improvements made after the date the building was originally placed in service may be applied with Section 179 deduction: 

• Improvements made to the interior portion of the building, except installation of elevators or escalators, and improving the internal structural framework of the building.  
• Roofs 
• Heating, ventilation, and air-conditioning property. 
• Fire protection and alarm systems. 
• Security Systems 

Section 179 Rules and Limits 

Trade-In of other Property. If you trade in other properties to acquire a qualifying property, you must exclude the value of the trade in property when figuring the Section 179 deduction. 

Business Use Percentage. You can only deduct the business percentage portion of the qualifying property. Remember that the business percentage use of the property must exceed 50% to qualify for the Section 179 deduction. 

Dollar Limit. For the tax year 2024, the dollar limit or the maximum amount that you can deduct using the Section 179 deduction is at $1,220,000 ($1,160,000 for tax year 2023). 

Qualifying Purchases Limit. If your total qualifying purchases placed in business for the tax year 2024 exceeds $3,050,000 ($2,890,000 for tax year 2023), your dollar limit will be reduced by the amount in excess of the purchase limit.  

Say for example, you placed in service purchases made in 2024 totaling to $3,300,000. Your dollar limit will be reduced by $250,000 ($3.3M less $3.05M) bringing it down to $920,000. 

Business Income Limit. Furthermore, you can deduct Section 179 only up to the amount of taxable business income during the tax year. However, you can carry over to the following year the portion of the Section 179 deduction that was disallowed due to the business income limit. 

The Section 179 Deduction is a great tax strategy that businesses may use for additional tax savings. However, you may still want to consult a tax professional to get a better understanding if using this immediate deduction will be the best option for your current situation.  

Want to learn more? 

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