The tax code is long and tends to get complicated if you don’t understand which sections apply to your financial situation or how they are calculated. The same applies to the Section 179 deduction.
The purpose of Tax Code Section 179 is to provide businesses with the opportunity to deduct the full price of software and equipment purchased during the eligible tax year rather than write it off through depreciation. It is designed to encourage companies to invest in themselves and receive a tax break in exchange for doing so.
Section 179 was called the “Hummer Deduction” or “SUV Tax Loop” because it originally allowed companies to write off the purchase price of the vehicles. Since it was originally introduced, this particular Section 179 benefit has been drastically reduced to prevent exploitation.
Section 179 is one of the few laws included in a recently passed stimulus bill to benefit the small business owner. Large businesses can benefit from it too, but the original goal and purpose was to give small business owners a much-needed tax break.
Help you understand exactly how the tax code works with a real life example. When a small business purchases equipment or other business necessities, it can write off the cost of the purchase in small increments through depreciation. This is beneficial, but it can take years to recover the full cost of the investment. With Section 179, small businesses can write off the full purchase price in the same year they purchase it.
This part of the tax code encourages small business owners to upgrade equipment and software, knowing that they can receive the full amount in deductions for the year the purchase was made. This helps both the business owner and stimulates the overall economy.
There are limits to Section 179 to prevent abuse and ensure it works the way it was originally designed. The total amount that can be canceled is limited to $ 500,000 for 2013 and the total purchase price cannot exceed $ 2,000,000. The deduction still applies beyond $ 2,000,000, but is phased out dollar for dollar. This ensures that the benefit actually helps small and medium business owners as originally intended. Large companies benefit in another way, as they can receive an additional 50 percent depreciation on any amount that exceeds the $ 2,000,000 threshold.
Any business that purchases, leases or finances less than $ 2,000,000 in used or new equipment during the tax year is eligible to benefit from Section 179. If the business is not profitable during the year and does not produce any taxable income, you can still benefit by using the purchase for the tax benefit of a future year when the business makes a profit. Qualifying purchases must be put into service and used in business sometime between January 1 and December 31 of the tax year to count toward the deduction. Most assets qualify for the deduction, including machines, personal property used in business, commercial vehicles, computers, software, furniture, and office equipment.
It is important to differentiate between bonus depreciation and Section 179. Bonus depreciation can only apply to new equipment purchases, while Section 179 applies as long as the purchase is new to you. In general, it is recommended to take the Section 179 deduction followed by additional depreciation. Any vehicle, software, and equipment must be used for business purposes at least 50 percent of the time to qualify for Section 179 benefits, and the cancellation is the total cost multiplied by the amount of business use.