A popular small business tax deduction, known as the “Section 179 Deduction” has just been extended. But what does that mean, exactly, and how might it impact you and your small business?
What is Section 179 of the IRS tax code?
Section 179 of the IRS tax code—which was first introduced in the 1980s and then renewed multiple times until being voted part of the permanent tax code at the close of 2015—was originally intended as a temporary stimulus to encourage small businesses to buy new equipment, which would in turn stimulate the economy. It stuck around, and many small business owners are thanking their lucky stars that it did. Essentially, Section 179 permits you to write off up to $500,000 worth of certain types of property—computers, cars, business machinery, and office equipment, for example—the same year the purchases are made.
According to regular depreciation rules, you can only deduct the costs of such property piecemeal, over the full term of a particular asset’s useful life (which can drag out as long as 39 years, in some cases). This means that an entrepreneur who opens a coffee shop and buys a shiny $4,000 espresso machine with a useful life of five years would have to wait the whole five years to see the total benefit of the tax break. In other words, the java-loving go-getter would be allowed to write off a portion of the espresso machine, in increments of $400 to $800 dollars, once every year for 5 years. Due to Section 179, however, they’d be able to deduct the entirety of their $4,000 investment in a single year.
The Senate Finance Committee also ruled to extend the “50% Bonus Depreciation” through 2019. This means that businesses will be able to depreciate 50% of the cost of equipment purchased (and used) in 2015, 2016 and 2017. For 2018, this depreciation will be 40% and in 2019 30%.
How does the Section 179 tax deduction affect my business?
The short answer to this question is that it doesn’t, unless you choose to take advantage of it. But for business owners who are purchasing equipment, there is potential to free up a lot of cash and make improvements in your business without upsetting your cash flow. Sans Section 179, the coffee shop owner in the example above might find themselves in the possession of a nice espresso machine, but with a period of cash flow troubles until that money is recovered.
How do I qualify?
To qualify for the Section 179 deduction, you need to invest in tangible personal property with a useful life of at least one year, that you use in your business more than 50% of the time. Examples of tangible property may include:
- Off-the-shelf computer software (standard software applications that are usually purchased from a third-party vendor)
- Office furniture and equipment
- Business vehicles with a gross weight in excess of 6,000 lbs.
- Property attached to your building that is not a structural component of the building (e.g., a printing press, large manufacturing tools and equipment)
- Equipment purchased for business use. Equipment purchased for both business and personal use can qualify for the deduction as well, the deduction being based on the percentage of time the equipment is needed for business purposes.
Investments that typically do not qualify for the Section 179 deduction include:
- Intangible property such as patents, copyrights, and trademarks
- Fences, swimming pools, or paved parking areas
- Property used outside the United States
- Air conditioning and heating units
- Permanent structures attached to land, including buildings and their structural components
As always, check with your tax advisor before making a purchase if you plan to take advantage of this deduction. Whether you choose take advantage of Section 179 or ignore it, it can’t hurt to do your research and speak to a professional. After all, why put off for another year what might help your small business today?
Jamison is a writer and researcher based in Salt Lake City, Utah. Along with the intricacies of entrepreneurship and small business, his interests include philosophy, literature and history.
This article was originally written on February 11, 2016 and updated on November 2, 2016.