What Is a Section 179 Deduction? All About This Business Tax Writeoff
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A Section 179 expense is a business asset that can be written off for tax purposes right away rather than being depreciated over time.
Section 179 of the U.S. tax code sets aside a large category of major purchases whose entire value can be used to write down a business’s taxable income in the year the purchased items are put into service.
For example, if you buy a new piece of machinery for your factory, and begin using it right away, you may be able to deduct the entire cost from your business’s taxable income when you file taxes the next year. This is true even though the purchase will continue to have value to you in future years.
Office furniture, computers and off-the-shelf software are among the business equipment covered by Section 179. It doesn’t generally cover real estate. While some vehicles, such as cargo vans, are eligible as Section 179 expenses, the federal government has narrowed businesses’ ability to write off vehicles traditionally used for personal transportation.
Another thing to remember when you’re considering business costs for tax purposes is that there are many expenses that are immediately deductible, regardless of whether they qualify for Section 179. These include rent, office supplies, insurance and some startup costs.
» Learn more: Small-business tax deductions you need to know
In contrast, Section 179 mostly deals with assets that will retain value after you begin using them and would otherwise be written off gradually during the course of their time in service.
What expenses qualify for Section 179?
Let’s get one thing out of the way: Section 179 is for business income, not personal income. If you personally bought a piece of equipment last year, that doesn’t count.
But, because lots of people have business income through activities such as freelance work or consulting, Section 179 is relevant to many households. There are many ways of setting up a business, all of which can affect taxes, but in general, the following types of purchases could be eligible for a Section 197 deduction.
Computer software that is not custom-made or modified specifically for your company.
Machinery and equipment.
Livestock.
Some vehicles.
There are other types of products to which Section 179 may apply, depending on the nature of your business and how you use the equipment. But there are some categories of expenses that you want to consider carefully before you count on a Section 179 deduction.
What are the 2022 section 179 limits?
If you’re preparing to file your business taxes for the 2022 tax year, keep in mind that the limits are lower than they will be for the 2023 tax year.
For 2022 (taxes filed in 2023), the maximum deduction is $1,080,000. The tax benefit begins to phase out at $2,700,000. There are also special limits for one notable category. The cost of a sport-utility vehicle deducted under Section 179 can’t exceed $27,000 in the 2022 tax year.
What are the Section 179 limits for 2023?
In the 2023 tax year (taxes filed in 2024), the maximum deduction under Section 179 will be $1,160,000. A business can combine multiple expenses to reach that total, but there is an overall limit on how much eligible equipment you can buy and still receive a deduction.
If you place in service more than $2,890,000 worth of property that would be eligible under Section 179, your maximum deduction begins to decline by the amount in excess of that cap.
Again, keep in mind the lower deductibility for SUVs: $28,900 in 2023.
‘Hummer tax deduction’: Which vehicles does Section 179 cover?
There was a time when Section 179 was jokingly referred to as the “Hummer tax deduction,” because some business owners were able to use the high limit for applicable expenses to buy expensive trucks.
Section 179 deductions are limited for vehicles under 6,000 pounds, which would affect tax considerations for many expensive cars . But large SUVs can be heavy, so they weren’t covered by those rules. That’s why the lower limit for SUVs is now part of Section 179.
So how do you know if your passenger vehicle qualifies for the Section 179 deduction? Here are some major factors that determine whether a vehicle is subject to the limit for SUVs.
It weighs more than 14,000 pounds.
More than nine people can sit in the vehicle behind the driver’s seat.
The vehicle has a cargo compartment more than 6 feet long, and the compartment isn't accessible from the passenger seating area.
The vehicle “has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.”
Does Section 179 cover real estate?
Broadly speaking, Section 179 doesn’t cover real estate purchases. If you bought a new headquarters for your business, you may have to rely on depreciation to receive a tax benefit from that transaction.
Land and land improvements, such as “swimming pools, paved parking areas, wharves, docks, bridges, and fences,” also aren't eligible, according to the IRS.
However, there are a few special types of property that may qualify as a Section 179 expense, according to the IRS.
Property used primarily for lodging.
Roofs.
Fire alarm and protection systems.
Security systems.
Ventilation, heating and air-conditioning property.
What if you don’t qualify for Section 179?
Section 179 will be increasingly important for businesses starting in the 2023 tax year because tax laws expanding the immediate deductibility of other business purchases are phasing out.
The Tax Cuts and Jobs Act allowed a practice known as “bonus depreciation,” to expand for several years. Through the 2022 tax year, people could use bonus depreciation to write off eligible assets right away. It’s similar to how Section 179 works, but it covers a wider range of expenses.
In 2023, the portion of an eligible expense that can be claimed in the year you start using it drops to 80%. It will decline each year until it is zero in 2027.
One source of comfort might be that there are no major changes in the works for common business deductions, such as office supplies.
But if you’re purchasing something that is more of a business asset that doesn't qualify for Section 179, it may turn out that you won’t be able to find an immediate way to write off some business costs.
