The Ultimate Guide to Section 179 and Bonus Depreciation
Section 179 of the IRS tax code allows you to apply the full purchase price of qualifying equipment and business expenses to deductions when filing your business taxes, all in the first year of purchase. So how can you ensure your business is getting the most out of it?
Are you taking advantage of all of the tax breaks available to your business? Did you know that fleet telematics hardware and software qualifies as a deduction under Section 179 of the IRS tax code? Under Section 179, your business-use vehicles, software, equipment and other business expenses can be counted as deductions. In addition to Section 179 is Bonus Depreciation, which can also help you to significantly reduce your taxable business profit. If your business qualifies for Section 179 and Bonus Depreciation, you can currently deduct 100% of your expenses for your purchase of any software or hardware for Fleet Telematics.
It’s important to stay updated on the provisions of these tax codes each year, as the cap on the amount allowed to be deducted and the rules around the types of vehicles, equipment and other expenses can change. For example, the 2020 deduction limit for Section 179 has increased from $1,000,000 for 2019 to $1,150,000. Here’s a year over year comparison of the changes:
With tax filing season 2019 marching forward, this 2019 Section 179 calculator can be useful in how to include Section 179 and Bonus Depreciation on your filing. For tax year 2020, use this 2020 Section 179 calculator to determine the amount of your expenses that are eligible for deduction and the total amount Section 179 can save you for the entire 2020 tax year.
What is the Section 179 Deduction?
Section 179 of the IRS tax code allows you to apply the full purchase price of qualifying equipment and business expenses to deductions when filing your business taxes all in the first year of purchase. This includes equipment that was purchased, leased or financed. For many business owners, being able to deduct the full purchase price of equipment such as cars, heavy machinery and other qualifying items from their gross income is a major relief during tax time.
Section 179 was initially created to be a tax relief for small businesses and to encourage businesses to buy equipment and invest in themselves. Before the Economic Stimulus Act of 2008, small business owners were only allowed to deduct up to $125,000 worth of qualifying equipment, with a Capital spend cap of $500,000. The 2008 Stimulus package and those following have significantly increased the amount of deductions available to businesses via Section 179. In the beginning, these initiatives were not expected to last, but they actually became wildly popular. Section 179 has even been popularly dubbed the “SUV Tax Loophole” and the “Hummer Deduction” as many businesses took advantage of the code by purchasing top tier vehicles.
Over the years, the IRS has been more pointed in their efforts to ensure that the code increasingly incentivizes small businesses. While large businesses are able to benefit from Section 179, small businesses are able to put more of their money toward other expenses and focus on growth. It also helps with the ability to purchase the necessary equipment you need immediately, without worrying about your bottom line.
In the past, equipment and expenses were only allowed to be written off a little at a time. For example, before Section 179 was implemented, a forklift purchased at $50,000 would be written off over 5 years, at $10,000 per year. Most business owners would rather deduct an expense from their gross income during the same year that they purchased it. Section 179 allows you to do that, with a few added requirements and limitations.
What is Bonus Depreciation?
Bonus Depreciation is another golden opportunity for businesses to get a break on taxation. It allows for depreciable business assets that have a recovery period of 20 years or less to be immediately deducted for the tax year it was put into service. Bonus Depreciation is also a product of the Economic Stimulus Act of 2008 that is meant to be utilized after the Section 179 deduction limit has been exhausted. The initial Bonus Depreciation rate was 50%. The Tax Relief Act of 2010 created additional relief for businesses by temporarily increasing Bonus Depreciation to 100% for the year. Then, at the end of 2015, the Path Act revived Bonus Depreciation at 50% through 2017. Since 2018, Bonus Depreciation has been at 100%, based on the Tax Cuts and Jobs Act.
In addition to the provisions set under Section 179, this 100% deduction applies to assets like:
- Film, television and production equipment
- Qualifying property
When looking to expense business use assets under Bonus Depreciation, the asset must have been acquired after Sept. 27, 2012 and before Jan. 1, 2023. Currently, Bonus Depreciation is significantly reduced for property that will be placed into service after 2022.
What’s the Difference Between Section 179 and Bonus Depreciation?
There are several important differences to note between these rules. To start, Bonus Depreciation is offered during some years and not others. There is also the consideration of the condition of the expenses at the time of purchase that varies between the two. Under Section 179, both new and used equipment can be applied, as long as it is “new to you”. However, In recent years, the Bonus Depreciation rules were modified to include used assets as well.
Bonus Depreciation is a relief for businesses who reached the spending cap under Section 179, on newly acquired capital equipment. In the case of businesses with net loss, some may be able to deduct the cost of new equipment and carry the loss forward. Section 179 trumps Bonus Depreciation unless the business lacks taxable profit. For businesses that fall under this scenario, they are allowed to carry the loss forward to future tax filings.
If you wish, you may forego the additional first-year depreciation option. If so, you can apply Bonus Depreciation to all other qualifying property, as long as it is in the same classification of the vehicle you’re delaying expensing and has been in service during the current tax year by the same taxpayer. For further information on Bonus Depreciation, Form 4562 goes into more detail about Depreciation and Amortization.
What are the Qualifications for Section 179?
For the tax year 2020, any business that purchases, finances or leases new or used qualifying equipment is eligible for the Section 179 Deduction. This only applies if your total expenses are less than $3,630,000. The rule applies to tangible goods like business-use vehicles, tools and heavy equipment, but also includes software and similar purchases. In order for these purchases to qualify, they must also be in service to your business between January 1, 2020 and December 31, 2020. The maximum amount of qualifying business equipment that can be expensed for the tax year 2020 is $1,040,000, which phases out, dollar for dollar, in the event that $2,590,000 worth of qualified equipment is placed into service. Also, to qualify as a Section 179 Deduction, any expenses must be used more than 50% of the time for business purposes.
One of the most popular deductions for business owners under Section 179 have been vehicles. Section 179 has even been dubbed the “SUV Tax Loophole” and the “Hummer Deduction” as many businesses took advantage of the code by purchasing top tier vehicles. However, in recent years, the rules and limitations of Section 179 have changed. As a business owner, it’s important to understand the details of this tax code in order to understand how it affects your business and what will be required of you when filing your business taxes. SUV’s and Crossover vehicles that weigh more than 6,000 lbs. but less than 14,000 lbs. have been limited to a total deduction of up to $25,000.
Vehicle purchases that qualify for the Section 179 Deduction must be used more than 50% of the time for business purposes. There is a deduction limitation of $11,160 that applies to certain passenger vehicles, however, the code accounts for vehicles that are less likely to be employed for personal use by allowing for full purchase price deduction. Vehicles purchased for business use can be deducted whether they are paid for in full, leased or financed. Section 179 allows the following vehicles to be deducted:
- Vehicles with the capacity to carry 9 or more passengers, not including the driver.
- Cargo vans or vehicles that have a fully-enclosed driver’s compartment or cargo area, no seating at all behind the driver’s seat and no passenger section within 30 inches of the leading edge of the windshield.
- Heavy construction equipment, including forklifts, etc.
- Most “over-the-road” Tractor Trailers.
There are also exceptions to the rules above as it relates to business use vehicles that can be deducted. The IRS considered that there are vehicles that are not considered above, that qualify as business use. The total deduction for these vehicles takes into account the Section 179 expense deduction as well as Bonus Depreciation. The total deduction for the following vehicles is limited to $11,160 for cars and $11,560 for trucks and vans.
Exceptions for qualifying business use vehicles under Section 179 includes:
- Transport Vans
- Non-personal use vehicles specifically modified for business
- Vehicles and trucks with a cargo area at least six feet in interior length
- Pickups with full-sized cargo beds
Equipment & Software
Enterprise software has become a major expense for businesses of all sizes. Section 179 allows for the purchase price of enterprise equipment and software to be deducted. In order for the equipment or software to be deducted, it must be purchased or financed with a qualifying lease or loan. The other main requirements for equipment and software under Section 179 is that it:
- Must be “Off the shelf” or not custom-designed.
- Must be available to the general public.
- Must be used in your business for income-producing activity.
- Must have a quantifiable, useful life.
- Projected to last a year or more
- Must NOT be subject to a non-exclusive license
- Must NOT have been substantially modified.
The IRS has released the final and proposed regulations related to Section 179 and Bonus Depreciation. They have been seen as tax-payer friendly and include:
- The option to treat certain components of self-constructed properties as eligible for 100% bonus depreciation.
- The inclusion of substantially all the assets of a trade or business.
- Updates and clarifications on certain rules related around property and prior use for consolidated groups, partnerships and related transactions.
- Industry-specific guidance for taxpayers that are regulated public utilities or that have had floor plan financing
Remember to stay updated in order to be aware of any changes from year to year. You can also visit the 2019 IRS Final and Proposed Regulations page for more information regarding Section 179 and Bonus Depreciation. To receive updates on changes to Section 179 or Bonus Depreciation, subscribe to the Tax Reform Provisions that Affect Businesses page.
Disclaimer: This article is only a guide. It is important that you consult with a tax professional about your specific tax provisions to ensure that your business qualifies for any local, state and federal tax incentives.