Section 179 is a provision in the U.S. tax code that allows businesses to deduct the full cost of qualifying equipment, machinery, or software purchases in the year the items are purchased and placed into service, rather than depreciating them over several years.
This provision is designed to encourage businesses to invest in capital assets by offering them an immediate tax deduction. Here are the key points about Section 179:
Key Features of Section 179:
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Immediate Deduction: Instead of depreciating the cost of an asset over several years, a business can deduct the entire purchase price in the year it was placed into service, up to certain limits.
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Eligibility: Businesses of all sizes can use Section 179, but the total amount deducted depends on the business's investment in qualifying assets and the limits set by the IRS for that year.
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Annual Deduction Limits:
- For 2023, the maximum deduction a business can claim under Section 179 is $1.16 million, as long as the total amount of equipment and property purchased does not exceed $2.89 million.
- If a business purchases more than the threshold (i.e., $2.89 million in qualifying assets), the Section 179 deduction begins to phase out on a dollar-for-dollar basis.
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Qualifying Property:
- Tangible personal property like machinery, equipment, and vehicles used in the business.
- Certain types of software (e.g., off-the-shelf software).
- Qualified improvement property for improvements made to non-residential property.
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Bonus Depreciation: In addition to Section 179, businesses can also take advantage of "bonus depreciation," which allows for a percentage of the cost of certain new or used property to be deducted in the first year of service. For tax years 2023 and beyond, bonus depreciation is set at 80% for qualified assets.
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Used Equipment: Section 179 applies to both new and used equipment, as long as the asset is new to the business and meets the requirements.
So, how much could you save with Section 179?
It's really dependent upon the equipment you choose, the tax bracket you're in, and your individual situation...but listed below is an example! The table below shows an example using a $50,000 piece of equipment and 35% tax rate. Geneva Capital also have a Tax Savings Calculator on their website that you can play around with for a more customized calculation!
When would Section 179 be better than standard depreciation?
When you need a large deduction to reduce taxable income and/or when you want to accelerate your tax deductions.
Did you know you can finance equipment AND use Section 179?
By combining financing with Section 179, you can protect your cash flow AND reduce your tax impact! When you finance as asset, you're making smaller payments over time versus paying the full purchase price upfront...leaving you more cash on hand for other expenses. Come tax time, if you used a Capital Lease (Conditional Sale) structure, you may be able to deduct the full purchase price in the first year...the same way you could if you paid cash, but without the large initial investment!
Whether you're an established business or making your first big equipment purchase Geneva Capital can help!
Questions?
(320) 762-8400
sales@gogc.com