What is the Section 179 Deduction?
Section 179 allows a business to write-off the entirety of an asset’s value for the year of initial use, allowing the business owner to frontload the tax savings and effectively reduce the cost of purchase.
The amount a business may claim under Section 179 Deduction has an annual limit. The Tax Cuts and Jobs Act of 2017 (commonly known as the “Trump Tax Cuts”) increased the maximum tax savings of an individual business from $500,000 to $1,000,000. From 2019 to 2020, the maximum tax savings has further increased to $1,040,000.
Additionally, the maximum amount of spent money a business can claim increased from $2,500,000 in 2019 to $2,590,000 in 2020. This means if your business’ average tax rate is 22%, the largest deduction your business can get is $569,800, even if your business spent over $3,000,000 in asset investments.
The maximum tax savings and maximum claim for each year are tied to inflation and are subject to change with each year. Some years it changes, and some years it does not.
Business equipment that qualifies is almost any asset with a useful life beyond one year. This includes office furniture, computers, buildings, equipment, commercial trucks, and commercial vehicles.
What Qualifies For A Section 179 Deduction?
- Physical property such as equipment, commercial trucks, and vehicles such as semi-trucks, dump trucks, box trucks.
- Furniture and most computer software qualify for Section 179.
- Buildings and land also don’t qualify, but some equipment attached to the building does, such as items like fire suppression systems, alarms, and air conditioning units.
- Purchased equipment and vehicles. Outright purchase or equipment finance agreements (EFA) qualify. The leased property, equipment, and or vehicles do not qualify.
- Equipment and or vehicles used more than 50% in your business.
- Not acquired from a related party. This includes siblings, spouses, parents, grandparents, descendants and businesses, trusts, and charitable organizations with which you have a relationship.
Not Eligible Assets
- Equipment and commercial vehicles acquired from a related party. This includes siblings, spouses, parents, grandparents, descendants and businesses, trusts, and charitable organizations with which you have a relationship.
- An asset that is primarily for personal use but occasionally used for the business isn’t eligible.
What Is The Section 179 Limit For 2020?
The amount a business may claim under Section 179 Deduction has an annual limit. The Tax Cuts and Jobs Act of 2017 increased the maximum tax savings of an individual business from $500,000 to $1,000,000. From 2019 to 2020, the maximum tax savings has further increased to $1,040,000.
This is great news for small to medium size business owners that are trying to expand their businesses and add more profit to the bottom line.
What Form Do I Use For Section 179?
Keep in mind that Form 4562 covers most, if not all, forms of depreciation. Section 179 relates to Part 1. Other Parts cover things such as MACRS depreciation (depreciation over time) and amortization (depreciation of an intangible asset, such as a patent becoming close to expiring).
Assuming you own a trucking business, you will absolutely need to fill out Part 5 before starting Part 1, as Part 5 pertains to most vehicular use.
The IRS places the most important sections before the less important sections, even if the less important sections can determine whether or not you need to fill out the more important sections, so prepare to jump around the pages quite a bit when filling out Form 4562.
In fact, if you are a fleet owner who provides vehicles to your employees, you very well might want to start at Part 6 and work your way backward!
Make sure to keep a copy of your Form 4562 for next year; this year’s line 13 is next year’s line 10 (both lines pertain to carryover of disallowed deduction and lead to lower tax liability).