Taxes can be a daunting and confusing task for many small business owners. Fortunately, there are many tax breaks and deductions available that can help ease the burden. One of the most significant tax breaks available to small business owners is the Section 179 deduction. In this article, we’ll discuss everything you need to know about the Section 179 deduction, including what it is, how it works, its limitations, and how to claim it on your taxes.
What is Section 179 Deduction?
The Section 179 deduction is a tax break. It allows small businesses to deduct the full cost of qualifying purchases made during the tax year instead of being depreciated over time. This deduction helps small businesses invest in themselves by providing an incentive to purchase equipment and/or software that can help improve business operations.
Section 179 Qualifications
To take advantage of Section 179, small businesses must meet specific qualifications. First, they must be for-profit and operate in the United States. Secondly, they must purchase or finance qualifying equipment and/or software during the tax year. The items purchased must be used for business purposes more than 50% of the time and be put into service during the tax year. Once the equipment is in service, small businesses can deduct the full purchase price up to the maximum deduction allowed.
Which Expenses Qualify?
Many business expenses qualify under the Section 179 deduction, including:
- Machinery and equipment
- Office furniture
- Building alarm systems
- A/C units
- Computers and software
- Inventory management systems
- Certain vehicles
Intangible items, such as patents and copyrights don’t qualify for the deduction. Purchases of real estate (land or buildings) are also ineligible. Items acquired from a related party (family members), as well as businesses or organizations you have a relationship with, cannot be claimed as a Section 179 deduction.
Section 179 Deduction Limitations
Although Section 179 can provide significant tax breaks for small business owners, there are limitations. The first limitation is the maximum deduction amount. For the 2023 tax year, the maximum deduction is $1,150,000. This means you can deduct up to $1,150,000 of the purchase price of qualifying equipment and/or software from your taxable income.
The second limitation is the spending cap. For the 2023 tax year, the spending cap is $2,890,000. If you spend more than the allowable cap, the deduction will be reduced by one dollar for every dollar spent over the cap.
The IRS may also impose deduction limits depending on the size of the vehicle purchased. Light vehicles (under 6,000 pounds) have a maximum limit of $12,200 (2023 tax year). Heavy vehicles (between 3 and 7 tons) are limited to $28,900. Any vehicle over 14,000 pounds or modified for non-personal use are not subject to any limitations and the full cost may be deducted.
Benefits of Section 179 For Small Business Owners
Section 179 can provide many benefits for small business owners. First and foremost, the deduction can help you offset the cost of purchasing items which can help improve business operations. By deducting the full purchase price of the equipment and/or software, you can keep more of your hard-earned money and reinvest in your businesses.
Second, the deduction can help you save money on your taxes. By deducting the full purchase price of the qualifying item, you can reduce your taxable income and the amount of taxes you owe.
How to Claim a Section 179 Deduction on Your Taxes
To claim a Section 179 deduction on your taxes, you must file IRS Form 4562 with your tax return. This form is used to report depreciation and amortization and includes an area for Section 179 deductions (Part I). To claim the deduction, you must list the qualifying equipment and/or software that you purchased or financed during the tax year. You must also include the deduction amount you are claiming.
The Section 179 deduction is a valuable tax break for small business owners that can help offset the cost of purchasing equipment and/or software. While there are limitations to the deduction, small business owners who meet the eligibility criteria can take advantage of the deduction and save money on their taxes. To see how Section 179 can benefit your small business, contact Tax Defense Network at 855-476-6920 for a free consultation today!