The Firstbase guide to section 179 deductions

With tax season rapidly approaching, it’s important to be aware of the tax deductions that could help your business save money. Our goal is to help you get the best possible deal on your taxes so that you can save money to grow your business.

Section 179 was created by the U.S. government to encourage small business owners to invest in themselves. It allows business owners to deduct the purchase price of equipment and property from their taxes at the end of the year.  

In this guide, we’ll tell you what you need to know about Section 179, the types of purchases that qualify, and how to file. 

What is Section 179? 

Section 179 of the IRS tax code allows businesses to deduct up to 100% of the value of equipment in the first year after buying it. You can deduct as much as 100% of the asset's value if you make a qualifying purchase.

This differs from other forms of depreciation, in which a portion of the equipment’s value is deducted over several years. For small business owners looking to make substantial investments into their company, the ability to immediately write off the entire purchase price is especially beneficial. 

Business owners may deduct up to $1,160,000 for the 2023 tax year. However, the section 179 deduction is intended for relatively smaller businesses, so your deduction will be limited as your equipment expenses increase.

If your business spends more than $2,890,000 on equipment, your available deduction will begin to be reduced on a dollar by dollar basis. Businesses that spend more than $4,050,000 on equipment won’t receive any deduction from Section 179. 

Keep in mind that the Section 179 deduction can’t create negative income. In other words, you can only use the Section 179 deduction to bring your total income down to zero.

What qualifies for deduction? 

Many types of equipment and property qualify for deductions under Section 179, including:

• Vehicles, including passenger vehicles 
• Software
• Equipment  
• Most other tangible business-use goods 

Land, land improvements and intellectual property are not eligible for deduction under Section 179.

Vehicles

These categories are generally self-explanatory, but vehicles in particular have led to a variety of controversies.

Section 179 had historically been exploited by some business owners, enabling them to write off the purchase of SUVs and other large vehicles. The government has since introduced limits on how much of a passenger vehicle’s value can be deducted. Let's take a closer look at how section 179 deductions apply to vehicles.

The exact amount depends on when the vehicle was purchased and put into service. A full breakdown of the limits on deductions for passenger vehicles is available on the IRS website.  

Additionally, some discretion is recommended when it comes to the type of purchased vehicle. Would you really be able to justify the purchase of a $190,000 Bentley SUV as a business expense if your business is a small-scale bake shop?

Using Section 179 inappropriately like this could get you into trouble with the IRS, and lead to — at the very least — a reduction in your tax deduction. Speak to a tax professional if you have any questions about specific 179 deductions.

Keep in mind that assets you use Section 179 to write off are subject to tax if you sell them later on.

Let’s say you purchase a lightly used pickup truck for your landscaping company for $35,000, and use Section 179 to write it off. The next year, you sell the truck for $25,000 because you want to purchase a different model. This represents a $25,000 gain, rather than a $10,000 loss, because the $35,000 purchase price was deducted in the same year the truck was acquired. You’ll have to pay what’s called depreciation recapture tax on this $25,000. 

Work vehicles — that is, vehicles which have no or virtually no personal use — generally qualify for a full deduction. Examples may include:

• Forklifts
• Shuttles or vans that can fit nine or more passengers
• Cargo vans
• Tractors 
• Hearses

50% business use requirement

In order to qualify for the Section 179 deduction, the equipment or property purchased must be used for the business at least 50% of the time. 

The amount you can deduct depends on the percentage of business use. For example, if you use a pickup truck for your business 80% of the time and for personal use 20% of the time, you may deduct 80% of the purchase price.

Again, you may be tempted to claim 100%, but you should be careful to only do so if it accurately represents the way the equipment is used. It is illegal to overstate the business use of equipment or property. As mentioned above, you would likely have to pay the tax on top of additional penalties if you misrepresent your equipment use.

How do I file?

Section 179 deductions are indicated on Form 4562, which deals with depreciation and amortization. 

Each part of the form covers different types of depreciation — for example, Part III focuses on MACRS (modified accelerated cost recovery system) depreciation, which sets out specific depreciation schedules for various assets.

Remember that any piece of equipment you’re writing off must already be in use by your business in order to qualify.

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