For business owners, Section 179 is one of the most important tax incentives to be familiar with, as it offers some of the most generous breaks to small- and medium-sized businesses and allows significant investment in growth when applied well to equipment purchasing choices.

Section 179 of the tax code offers businesses the opportunity to deduct the total price of qualified equipment or software that was purchased or financed and put into use within the tax year being filed. Over the past couple of years, it has been revisited and expanded upon multiple times through stimulus and tax updates passed by the federal government. The deduction must be elected for using Part 1 of Form 4562.

All businesses can benefit from this tax deduction, provided you purchased, financed, or leased new or used equipment or software and put it into use during the tax year below certain spending maximums. Most tangible goods qualify for the deduction such as tools, office furniture, computer equipment, vehicles, and more, but to ensure that your purchased equipment qualifies, consult with your tax advisor on all purchases you believe may qualify for the tax year.

For purchased goods that are written off under Section 179, more than 50% of their use must be for business purposes. Thus, a laptop that is used 25% for business use and 75% for personal use would not qualify. If the equipment or software is mixed use for business and personal use, you will need to multiply the percentage of time that it is used for business use by the total purchase price to arrive at the total that can be written off as a deduction under this rule.

Beyond a certain business size, this deduction is diminishingly beneficial as the deduction is targeted at small- to medium-sized businesses through a spending cap. 

For the 2021 tax year, the deduction limit is $1,050,000. In addition to this limit on the total that can be deducted, there is also a spending cap of $2,620,000. Any amount over this limit will reduce the deduction available to your business on a dollar for dollar basis. Due to this spending cap, businesses that spend more than $3,670,000 cannot claim the deduction at all.

Section 179 cannot create a loss for the company. If your deduction would create a loss, the excess deduction must be carried forward to the following tax year.

For pass-through businesses, you must take extra care to prevent over deducting, as the maximum deduction of $1,050,000 also pertains to the shareholders’ personal returns. If your shareholders will be filing for the deduction, all shareholders and the business still have a combined limit of $1,050,00.

Bonus depreciation is another tax deduction available to businesses which allows the cost of depreciable assets purchased to be written off as they depreciate over the years after purchase. The bonus depreciation is not offered every year, but for 2021 it is available at 100% for businesses on their 2021 tax return. The bonus depreciation option is particularly useful to larger businesses whose spending exceeds the limits on Section 179. Although bonus depreciation can be claimed by any business, for smaller businesses Section 179 is often more advantageous and is applied first to purchases for the year before bonus depreciation.

It is important to recognize how your business’s new investments in equipment over the past tax year may be applied on your income tax returns. Be sure to discuss all your purchases for the year with a qualified tax advisor to ensure you properly account for qualified purchases using the deductions available to your situation.