What exactly is Section 179?
Paul: Well, I can touch on a little bit of the history here. Section 179 goes back to 1958. For a long time, it was limited to smaller businesses. A maximum of $10,000 of deductions were allowed. That has gradually increased to where it’s now a lot higher.
What Section 179 does is allow businesses that purchase property for their business – whether it’s furniture, computers, machinery, or other assets used in a business – to expense the full amount in the year the equipment is placed in service. So, there are some tax benefits to doing that.
What’s the difference between standard depreciation and Section 179?
Paul: The IRS will require you to depreciate or expense equipment over its useful life – expensing a little bit each year. They’ll also allow accelerated depreciation, which means you can take more of the expense in the early years and less in the later years, but it becomes fully expensed after its useful life, typically five to seven years.
With Section 179, you’re allowed to expense the full amount of the equipment in the year that it’s placed in service – so, fully depreciate it in the first year.
When would you use Section 179?
- When you need flexibility to precisely target a specific net income number
- If your state disallows bonus depreciation
- If you need a first-year write-off
When would you only use standard depreciation?
- You want to spread deductions over multiple years
- Your business has little to no taxable income this year
- You want to save some deductions for the future
How does Section 179 compare to Bonus Depreciation?
Paul: They’re very similar in that they both can allow for immediate expensing of equipment, but there are some key differences:
- The State Level. Most states will allow Section 179, but most states will not allow bonus depreciation. They’ll make you recalculate it at the state level. So that’s another case where somebody might want to take Section 179 to get the full benefit with their state. You have to discuss that with your tax advisor.
- Limitations. While Section 179 has some limitations on dollar amounts, bonus depreciation doesn’t have those limitations. So, bonus depreciation can be used by any size business, not just smaller businesses.
- Showing a Loss. You cannot use Section 179 to create a loss. You can only take your taxable income down to zero and no further. But with bonus depreciation, you can create a loss as large as you want.
- Asset Selection. With Section 179, you can pick and choose which assets you want to take the expense on. With bonus depreciation, it’s essentially all or none.
Can someone use Section 179 and Bonus Depreciation together?
Paul: Well, you certainly can. You can take Section 179 on some equipment, then by default everything else will be subject to bonus depreciation. You actually have to opt out of bonus depreciation. Just keep in mind that if you’re a larger company, you cannot take Section 179 at all.
Andrew: So, even if it’s within the five to seven year classification that you chose bonus depreciation on, you can still pick one asset within that to use Section 179 on?
Paul: Yep. As long as you’re qualified to take Section 179. Again, if you purchase more than $4 million of equipment over the course of the year, that starts to phase out Section 179.
What size business is Section 179 best for?
Andrew: Section 179, with those smaller initial limits, was actually geared more toward small businesses. I think it started out with $10,000. Is that right, Paul?
Paul: Yeah, it started out with a $10,000 deduction. So it was actually intended to help small businesses with making those purchases and getting some of the tax benefits that larger corporations already can take advantage of in other areas.
Especially if you don’t need a very large write-off, bonus depreciation might work against you. If you’re a smaller business, you may want to opt out of bonus depreciation and simply elect Section 179 on certain pieces of equipment to take your taxable income down to a level that makes sense.
Why should you know your tax situation NOW?
Andrew: If I’m a business owner, the biggest thing I want to know is if I thought I was going to have taxable income at the end of the year and what that amount would be. If I know that that’s going to be a larger amount than I’m comfortable paying taxes on, then I’d want to potentially look at equipment acquisition to offset some of that.
The new equipment has to be put into service in the calendar year that you’re taking the deduction, so you can’t say in April, “Oh, I’m buying equipment to depreciate for last year.” It has to be put into service in the calendar year that you’re using Section 179.
Paul: You also can’t make a down payment on a piece of equipment in December, let’s say, and the equipment isn’t delivered until February. You would have to wait until the next year to take advantage of Section 179 or bonus depreciation because it does have to be placed in service by the end of the year.
Andrew: It’d be a really great idea for business owners to meet with their tax professionals either late quarter three or early quarter four to understand their needs and make sure there’s time to get the equipment ordered and delivered prior to year-end.
Paul: Don’t buy something just to get the tax deduction. But if it’s some equipment that you’re going to need, it may be beneficial to accelerate that purchase into the current year because you could end up saving quite a bit on taxes, depending on what tax bracket you’re in.
Andrew: What’s the current dollar limit on Section 179?
Paul: The exact dollar limit is $2,560,000 per year. And that is as of 2026. It is indexed to inflation, so it should go up a little bit each year.
Andrew: Don’t delay. Talk to your tax advisor now and get with your equipment vendors on the equipment you want to purchase. And we’re here to help. We can defer those payments into next year, maximize your tax benefits, and get you the equipment you need to continue to grow your business.
