Section 179 of the Internal Revenue Code allows taxpayers to expense qualified property. The Section 179 deduction allows business owners to get tax deductions more quickly compared to regular tax accounting methods. Only certain property qualifies for the deduction, and the deduction amount phases out if asset purchases are high.
Expenses Versus Capital Assets
Business expenses may not be good for a company's bottom line, but they do create a tax break. Businesses are allowed to deduct business expenses from income to reduce the basis for income tax. Unfortunately, accounting standards require businesses to capitalize the purchase of assets. That means that instead of getting an immediate tax deduction for an asset purchase, the deduction is spread out over the life of the asset.
Section 179 Basics
Section 179 provides an avenue for business owners to get a larger initial deduction for asset purchases. Business owners can expense up to $25,000 of qualifying property in the year of purchase. If there is any asset value left over after the Section 179 deduction, the business can continue to depreciate the asset normally beginning in the year of purchase. For example, say that a business purchases a $35,000 building expected to last ten years with no residual value. The business can claim the $25,000 Section 179 deduction in the first year. In addition, the business can also claim a straight-line deduction of $1,000, which is the $10,000 residual value divided over 10 years, in the first year.
Section 179 Phase-Outs
Section 179 is designed to benefit small businesses with a modest amount of asset purchases. If the business purchases a large dollar amount of assets, the deduction may be reduced. After $2 million in qualifying property purchases, the deduction begins to phase out dollar for dollar. For example, a business can instantly expense $25,000 of a $2 million qualifying asset purchase under Section 179. However, the business could only expense $15,000 if the total asset purchases that year are $2,010,000
Section 179 doesn't work for every asset. Tangible personal property used in a business expected to last more than a year qualifies for the Section 179 deduction. Common qualifying tangible personal property includes business equipment, machinery, buildings furniture and computers. Some intangible personal property, like computer software, qualifies for Section 179, but patents, copyrights and trademarks do not. Land and permanent structures attached to land, like parking lots and fences, don't qualify for Section 179. Inventory, air conditioning and heating units, and property used outside of the U.S. also are excluded.