What is the Section 179 Asset Deduction?
When purchasing certain assets for business use, you typically have the option of deducting from your income a percentage of the asset's depreciated cost over several years. With assets that qualify for the section 179 deduction, however, you may instead choose to deduct the asset's full cost in the year it is placed in use. Which option you choose depends on your specific tax situation.
What Qualifies for a Section 179 Deduction?
To qualify as a section 179 asset, the property must be:
- considered eligible property;
- acquired for business use; and
- acquired by purchase.
Eligible property includes tangible personal property (items that can be measured, seen, and touched, such as machinery, office furniture, tools, and vehicles); single-purpose agricultural or horticultural structures; storage facilities (except buildings and structural components) used in distributing petroleum or any primary product of petroleum; and off-the-shelf computer software.
Property can be new or used. If the purchase involved a trade-in, you can only count the cash paid after the trade-in towards the deduction. Financed purchases can also qualify. Use Form 4562 Depreciation and Amortization to elect the section 179 deduction.
There are some limitations on section 179 deductions, including:
- A $25,000 limit on certain sport utility vehicles (typically those between 6,001 and 14,000 pounds)
- A $500,000 limit on most eligible property. (This is based on the 2013 IRS guidelines; the section 179 deduction limit is sometimes affected by the changes Congress makes to tax law changes each year.)
- A business income limit restricts a section 179 deduction to exceed a business’ net income for that year.
One of the main benefits of section 179 deductions is that you aren’t required to write off the full amount of the asset. You can instead choose to treat a portion of the cost as section 179 and depreciate the remaining balance over the life of the asset. Additionally, if your business has purchased a number of section 179-qualified assets, you can designate some as section 179 and depreciate the rest. This allows you to examine the tax advantages for your situation on an annual basis.
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