When exploring options for increasing revenue and/or cutting expenses, there are plenty of government options designed to help your small business grow and stimulate the economy. In the past, we’ve explored bonus depreciation and how it can be used to write off assets upfront in order to cut expenses. But there are other tax codes and credits that can help offset some of your company’s immediate expenses and subsidize the cost of your most expensive production tools.
One such code is called Section 179. But how does it work and how can it best be used to benefit your business?
What is Section 179
Section 179 is an article of the U.S. internal revenue code (commonly referred to as IRS code or IRS tax code) that allows businesses to immediately expense the full purchase price of qualifying equipment or vehicles. Similar to certain types of depreciation, this code was designed so that new, small or cash-depleted businesses can invest in themselves without the stress of seeking funding or taking on additional debt.
How Does Section 179 Work?
In order to implement the Section 179 tax code benefit into your business, first, you need to ensure that the asset is eligible. In order to qualify for a Section 179 deduction, your asset must meet four key qualifications:
The Asset Must Be Tangible
Only physical assets such as production equipment, computers, furniture, and vehicles qualify for Section 179 deductions. Intangible assets such as business licensing and production fees do not qualify for Section 179.
The Asset Must be Under Your Ownership
You must own the property or asset in order for the asset to qualify for Section 179. Leased, borrowed, or property not in your name cannot qualify for this deduction.
The Asset Cannot Be Acquired From A Related Party
\Assets that are gifted and/or inherited from another business, relative or charitable organization that you’ve had a previous relationship with do not qualify for Section 179 deductions.
The Asset Must Be In Use
It is against the law to write off assets that have been purchased but not currently aiding or affecting your business. If you purchase eligible equipment or assets but choose not to implement them into your business plan before the end of the taxable year, you will not be able to deduct the cost of that asset until the following year. Assets that are used primarily for personal use but have some business function (i.e. vehicles or other mechanical equipment) are generally not eligible for Section 179 deductions.
Lastly, you will need to file a claim in order to receive your Section 179 benefits. In order to claim your deduction, you need to fill out Part 1 of the 4562 Form. When filing your claim, be sure to include a description of the asset, the total cost, and the amount you would like to deduct from Section 179.
Claiming Section 179 on Vehicles
Section 179 is commonly used to expense vehicles, though the rules surrounding which types of vehicles are covered under the deductible have changed in recent years. As of 2022, the rules limit the amount you can deduct from Section 179 for passenger vehicles, trucks, and vans to $11,160 for cars and $11,560 for trucks and vans.
According to Bench, vehicles that qualify for the full Section 179 deduction include:
- Vans that can seat nine or more passengers, such as hotel or airport shuttles
- Vehicles with a fully enclosed driver’s compartment and no seating behind the driver’s seat, such as a cargo van
- Heavy construction equipment
Vehicles that are used for both personal and business use may qualify for Section 179 but are generally assessed on a case-by-case basis.
Differences Between Section 179 and Bonus Depreciation
Section 179 is similar to bonus depreciation in that they are both IRS institutions that allow businesses to recoup operational expenses in order to facilitate growth. However, there are some key differences.
For starters, Section 179 allows you to write off the FULL amount of your purchase upfront rather than as a percentage over its useful lifestyle. This is a pivotal difference for businesses seeking to expand in 2022 and beyond, as the eligible percentage of equipment expenses you can write off begins to phase out from 100% to pre-pandemic levels.
Secondly, there are limitations on the total amount you can expense annually through Section 179. As of 2022, the total amount a business can deduct using this tax code is $2,700,000 for equipment purchases and $1,080,000 for additional expenses such as property. After the annual equipment limit has been reached, the deduction begins to phase out until the entire deduction is reached at $3,780,000. Because bonus depreciation is based on percentages, it has no such limit.
Section 179 is also limited to your business’ net income while bonus depreciation can exceed your annual income.