TAXES & ACCOUNTING • April 14, 2016
1 minute Read
The name of Section 179 suggests that it’s part of an ominous tax code that you need a team of accountants and tax lawyers to penetrate. But really, despite the rather bureaucratic title, Section 179 tax deductions are fairly easy to understand.
Essentially, this section outlines what equipment and/or software qualifies for a tax deduction. Whether you purchase or lease it, you may be able to deduct the full cost of qualifying equipment from your gross income.
The other important part of Section 179 is the 50 percent Bonus Depreciation. This is generally taken after the spending cap is reached (see below) and affects new (not used) equipment. This lets you write off an additional 50 percent of the amount a piece of equipment has depreciated.
What are the new Section 179 deduction limits for 2016?
The limits on how much can be deducted often change from year to year. For 2016, the maximum amount that can be deducted is $500,000. Further, there is a $2,000,000 limit on what a business can spend on equipment in order to qualify for Section 179 deduction. Each dollar you spend over this $2,000,000 amount is one less dollar you can deduct. For example, if you spend $2,100,000 on equipment, you only qualify for $400,000 in deductions. The main reason for this cap is to ensure Section 179 remains a deduction that directly targets small to medium-sized businesses.
What did Section 179 deduction limits used to be?
At one time, Section 179 was referred to as the “SUV loophole” or the “6,000-pound vehicle tax deduction” because businesses used it to write off qualifying vehicles, such as SUVs or Hummers. Today, things are much more restrictive when it comes to vehicle purchases.
The amount small businesses are able to deduct has greatly increased over the years. In 2007, businesses that spent less than $500,000 a year could write off up to $125,000. From 2008-2009, this amount doubled to $250,000, and then later doubled again to its current amount of $500,000.
What does the new Section 179 limit mean for small businesses?
At its heart, Section 179 is a part of a stimulus program that is meant to offer tax incentives to small businesses that invest in themselves and in the equipment needed to grow. With the Bonus Depreciation written into this year’s tax code (it isn’t there every year), small businesses will have more financial motivation to invest in themselves.
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IMPORTANT INFORMATION: This is not investment, tax, or legal advice. Should you have questions, please consult your own attorney, tax accountant, or other appropriate expert having expertise in the area of your question or before making important decisions in these areas.