What is Section 179? (& How It’ll Save You Money in 2023) [Updated]
Editor's note: This post was originally published on December 24, 2021, and has been revised for clarity and comprehensiveness.
To quote Benjamin Franklin, there are two constants in life: taxes and death. But since we can’t accurately predict when or how we die, we’re left to muddle through our taxes (though, sometimes, taxes are their own guessing game!).
Luckily, since taxes are a human invention, the tax code has multiple sections that can ensure you get benefits for your company.
One of these beneficial regulations is Section 179.
As a Managed IT Service Provider (MSP) with multiple business expenses and managing equipment procurement for our clients, we’re intimately familiar with Section 179. In this article, we’ll answer common questions such as:
- What is Section 179?
- What should businesses know about Section 179?
- What are the limitations of Section 179?
By the end of this article, you’ll have a solid grasp of Section 179 and understand how to utilize it to your advantage.
What is Section 179?
Section 179 is a tax code section that allows businesses to deduct the total cost of equipment or software they bought during the year. It essentially allows you to write off the total price of the equipment from your business’ taxable income.
You’ll no longer have to deduct a small portion of the depreciated asset value throughout the years. Businesses get immediate tax relief.
It’s most beneficial for small businesses, but larger enterprises can also utilize it because the US government implemented it to encourage companies to invest in their improvement. As long as you’ve spent less than $3,780,000 on equipment, you’ll benefit from this write-off.
What should businesses know about Section 179?
Here are the quick facts and limitations you should know about Section 179:
1. All businesses that buy, finance, or lease new or used business equipment qualify for Section 179 deduction.
If you spend less than $3,780,000 for equipment, you can qualify for the Section 179 Deduction.
2. The equipment must be used for business tasks more than 50% of the time.
Some CEOs squeezed in personal vehicles and equipment as a tax write-off, taking advantage of Section 179 to get away with it. That’s why businesses must now use all current equipment purchases for strictly company tasks.
3. If the equipment is “new to you,” you can deduct it from your taxes.
It doesn’t matter if the equipment is second-hand. If it came into your business as a piece of new equipment, it’s considered for the Section 179 Deduction.
4. You can write off up to $1,080,000 from your gross income.
Whatever equipment you buy and use within the fiscal year, you can directly deduct up to $1,080,000 from your gross income, equivalent to the value of your purchases.
The amount deductible also varies yearly, as the US government adjusts it based on factors such as the cost of living. In 2023, expect the deductible amount to stay around $1,080,000.
5. Your deductible lessens dollar-per-dollar if you spend over $2,700,000 on new equipment.
Let’s say you’ve spent $3,000,000 on new equipment, supplies, and software for your business. Instead of being able to declare $1,080,000 off your taxes, you have to deduct the excess $300,000 from the $1,080,000.
You’ll only be able to write off $780,000.
This limitation is in line with Section 179’s primary goal of helping small to medium-sized businesses (SMBs) invest in their growth. Larger enterprises need to take advantage of bonus depreciation. Luckily for SMBs, the government has granted small businesses the opportunity to use bonus depreciation to their advantage.
6. You can deduct 100% of the equipment’s 1st-year depreciation cost as a bonus depreciation cost.
For example, you spent $2,000,000 in 2022 on equipment. You can deduct $1,080,000 from your gross income and declare the remaining $920,000 as a bonus depreciation expense.
Bonus depreciation is a separate benefit from what’s laid out in Section 179. Essentially, it’s another kind of tax write-off declared at the government’s discretion. Businesses can rely on 100% bonus depreciation until 2023, then the allowable percentage will steadily go down until 2026.
Ready to save money on your equipment?
Every business wants to save on taxes, and Section 179 is one of the critical sections in the IRS tax code that helps you do that.
Section 179 is a tax deduction meant to help businesses invest in themselves. Instead of paying the taxes back to the state, you can give your business relief and focus on growing your business.
The top things business should know about the Section 179 deduction are:
- All companies that buy, finance, or lease new or used equipment qualify for Section 179 deduction.
- You can remove up to $1,080,000 from your total gross income.
- You can deduct 100% of the equipment’s 1st-year depreciation cost as a bonus depreciation cost.
- As long as the equipment is “new to you,” you can deduct it from your taxes.
Tax deductions are one of many ways to save money on your equipment. You can also save money in your business through other means, such as proactive IT.