Updated on November 6, 2024.
Section 179 is a tax deduction for business-related equipment expenses, allowing owners to deduct the entire cost of large expenses such as machinery, office furniture, and even vehicles from their annual tax bill immediately instead of with traditional depreciation, which spaces it out over time.
It is similar to depreciation in that you’re taking tax deductions on assets that depreciate like software or a vehicle, but different in that you can take the full amount in the first year (or a few years when there are limits) vs. always having to divide it up over multiple years. And this is where you, as a business owner, can choose which option works for your business needs.
Section 179 offers significant financial relief for owners of small and medium-sized businesses, incentivizing them to offset their tax burden by investing in these types of assets. While capital asset purchases like machinery or software are allowed under Section 179, it doesn’t include things like real estate, inventory, or office supplies.
This deduction is designed as a way to reduce your business’s total tax bill by deducting eligible equipment purchases, so that you can save money and bolster your company’s capital assets.
First enacted in 1958, Section 179 allows you to immediately deduct the cost of these assets during the year in which they are put into service. It is an alternative to the system known as depreciation, which trickles out your federal tax benefits on large purchases over a period of years.
Section 179 has grown exponentially in recent years, bumping from just $10,000 in maximum expenses in 1992 to $1,220,000 for 2024.
How Section 179 Deductions Work
The Section 179 tax deduction works by letting you deduct the full amount of depreciation during the first year rather than spreading it over multiple years. When you buy large business equipment or permanent assets, like real estate, you’re not allowed to deduct the entire purchase within a single tax filing year.
Instead, you need to spread the deduction over the expected life of the asset (as determined by the IRS), through a system known as depreciation. We’ll use a tractor as an example.
The IRS classifies a tractor as a three-year asset property. If you buy one for $60,000, you can typically only deduct $20,000 per year for three years under this system. With the Section 179 equipment deduction exception, you’re able to deduct the full purchase price of that tractor from your taxes in the first tax year.
Suppose you have a tax liability of $100,000 and the vehicle from above that depreciates over 3 years at $20,000. By taking the Section 179 selection, your tax liability this year becomes $40,000 instead of $80,000, so you pay less now so you can have more cash on hand to reinvest in your business this year. But make sure you talk with your accountant about this as part of a long-term strategy since taking the full Section 179 selection this year means you won’t have any depreciation deduction for the tractor next year or the year after.
| Without Section 179 | With Section 179 | |
| Liability Before Deduction | $100,000 | $100,000 |
| This Year’s Deduction | $20,000 | $60,000 |
| Next Year’s Deduction | $20,000 | 0 |
| Third Year’s Deduction | $20,000 | 0 |
| Tax Liability for This Year | $80,000 | $40,000 |
| If Taxes are 30%, you owe this much in taxes this year: | $24,000 | $12,000 |
The Section 179 deduction exception has limits, though:
- You can only deduct eligible purchases up to the annual limit, which typically changes each tax year.
- You cannot create a loss by using the 179 selection (I.e. your net income cannot fall below zero due to a 179 deduction).
- In order for your purchases to qualify, the individual assets themselves cannot cost more than the total annual limit for that tax year.
- The Section 179 deduction begins to phase out dollar-for-dollar after the total annual limit is reached and discontinues entirely after you make a certain amount in eligible purchases.
Pro-tip: Pay attention to the total purchase limit and how it changes each year. If you’re getting close to it, consider postponing any additional purchases so you don’t lose any of your eligibility for the year.
Which Purchases Are Eligible?
Eligible Section 179 deductions include physical items that are purchased as business assets, like machinery, software, and vehicles. There are limits to some of the purchases, like vehicles must weigh between 6,000 and 14,000 pounds and be used for business 50% of the time or more. You also have to keep the annual deduction limit in mind.
Examples of eligible purchases include:
- Machinery, tools and equipment
- Office furniture
- Computers, software, printers and other electronic equipment
- Vehicles (between 6,000 and 14,000 lbs)
- Smartphones and tablets
- Improvements to business buildings as well as installing fire alarms, roofing, and security systems
Some purchases that aren’t eligible for deduction include:
- Payroll
- Office expenses (utilities, rent, etc.)
- Travel costs
- Intangible assets (patents, copyrights, etc.)
- Land and real estate assets
According to the IRS, Section 179 deductions also apply to items for personal use, like laptops and cellphones, as long as 50% or more of their usage is for business purposes. You can view the IRS additional rules for equipment to learn more.
The IRS also limits the potential deduction for cars, trucks, and SUVs. For example, in 2024 you can deduct up to $30,500 of the purchase price in year one. If the vehicle costs more than that, you are allowed to carry over the rest of that purchase price as a deduction in subsequent tax years.
If you buy an $80,000 SUV for your business, you can deduct $30,500 in year one. You can then carry over the remaining $49,500 purchase price into years two and three, until the entire asset has been deducted.
For business-specific vehicles that aren’t also used for personal transportation — like cargo vans, tractor-trailers, and heavy construction equipment — you can claim 100% of the purchase price in the first year under the Section 179 deduction.
Not all business purchases qualify for the 179 tax deduction. It doesn’t apply to non-physical expenses like payroll and travel, for example. You can’t use the Section 179 deduction for buying land and real estate either, and it doesn’t apply to intangible assets like patents and copyrights.
How Section 179 Can Be Applied to Leased Equipment
The Section 179 equipment deduction can still be used for equipment financed with a lease, similar to purchasing equipment outright, as long as your agreement meets some specific requirements. How much you can deduct depends on whether you are using a capital or operating lease.
- Capital lease agreements are rent-to-own deals: You agree to buy the asset at (or by the end of) the contract. This is a great way to turbocharge your tax breaks because you can immediately deduct the full cost of the asset with the Section 179 deduction while only paying part of the purchase price. For example, you can lease a $90,000 bulldozer with a three-year agreement — committing to three annual installments of $30,000 — but deduct the entire $90,000 purchase price from your taxes in year one.
- Operating lease agreements involve only renting the equipment, with the plan to give it back at the end of the contract. You can’t use the Section 179 deduction for these leases (as you’re not purchasing an asset for your business) and you can only deduct your monthly payments, making them less tax effective. This means that if you rent a bulldozer for $2,000 per month for six months, you could deduct the $12,000 rental fee though you wouldn’t own any part of the asset at the end of that rental period.
How Section 179 Has Changed
The Section 179 deduction was introduced into US tax code in 1958. Since then, it has undergone many updates and changes.
2024
- For tax year 2024, businesses can take a total expense deduction of $1,220,000, which is $60,000 higher than in 2023.
- The total deductible purchase limit for businesses is $3,050,000 for 2024, at which point the deduction begins to phase out.
- Businesses can apply a bonus depreciation of 60% on special equipment placed in service in 2024 (down from 80% in 2023).
- Select equipment, like film production equipment and other items with a long production period, are still eligible for the 80% special depreciation limit.
- Business vehicle purchases are limited to a deductible exception of $30,500, up from $28,900 in 2023.
2023
- For tax year 2023, businesses could take a total expense deduction of $1,160,000, which was $80,000 higher than in 2022.
- The total deductible purchase limit for businesses was $2,890,000 for 2023, at which point the deduction began to phase out.
- Businesses could apply a bonus depreciation of 80% on special equipment placed in service in 2023 (down from 100% in 2022).
- Business vehicle purchases were limited to a deductible exception of $28,900, up from $27,000 in 2022.
2022
- For tax year 2023, businesses could take a total expense deduction of $1,080,000, which was $30,000 higher than in 2021.
- The total deductible purchase limit for businesses was $2,700,000 for 2022, at which point the deduction began to phase out.
- Businesses could apply a bonus depreciation of 100% on special equipment placed in service in 2022.
- Business vehicle purchases were limited to a deductible exception of $27,000, up from $26,200 in 2021.
2021
- For tax year 2021, businesses could take a total expense deduction of $1,050,000, which was $10,000 higher than in 2020.
- The total deductible purchase limit for businesses was $2,620,000 for 2021, at which point the deduction began to phase out.
- Businesses could apply a bonus depreciation of 100% on special equipment placed in service in 2021.
- Business vehicle purchases were limited to a deductible exception of $26,200, up from $25,900 in 2020.
2020
- For tax year 2020, businesses could take a total expense deduction of $1,040,000, which was $20,000 higher than in 2019.
- The total deductible purchase limit for businesses was $2,590,000 for 2020, at which point the deduction began to phase out.
- Businesses could apply a bonus depreciation of 100% on special equipment placed in service in 2020.
- Business vehicle purchases were limited to a deductible exception of $25,900.
How Bonus Depreciation Factors In
Bonus depreciation is another way to deduct eligible business purchases from your overall tax burden, and can be used in conjunction with the Section 179 deduction. This deduction is similar to Section 179 in that it lets you take an upfront tax break for the cost of buying assets without spreading the purchase out over time, but the difference is that, while it applies to a broader array of assets — like film or theatrical production equipment — and doesn’t have an annual limit, it doesn’t allow for a 100% deduction.
Previously, bonus depreciation only covered new equipment; in recent years, the law has changed to allow used (“new to you”) equipment. With this first-year bonus, you can claim a portion of the purchase cost for most equipment with no total expense limit, and it can be stacked with your Section 179 benefit.
Unlike Section 179 limits, the bonus deduction percentage is set to decrease each year until it hits 0% in 2027. So, if you have any major equipment purchases planned and want to capitalize on bonus depreciation along with your Section 179 deduction, consider acting sooner rather than later.
Section 179 deductions can be a very valuable tool when it comes to reducing your business’s total federal tax burden, especially if you purchase eligible equipment, machinery, and even a business vehicle. By allowing you to write off the purchase of those assets in the same tax year you buy them (rather than depreciating them over time), you’re able to keep more money in your company’s pocket. A deduction like Section 179 provides owners of small and medium-sized businesses with an easy (and profitable) win.
You should always consider working with a small business tax professional to learn about your individual options and stay on top of ever-evolving federal laws. Be sure to visit the National Funding blog for more articles on tax information, possible deductions, and financing for your small business equipment purchases.
*Some deductions listed may not be available to your small business. Consult with your tax advisor before claiming a deduction on your tax return.
