When you own a business, there are a wide range of tax deductions and exemptions that you may be able to qualify for. One type of deduction that may be available to you involves Section 179 depreciation, which applies specifically to depreciable assets. Knowing what this tax deduction is may help you reduce the amount of taxes you owe. Here’s a more detailed explanation of Section 179 and how depreciation can be calculated.

Section 179 Depreciation

What Is Section 179?

Section 179 refers to a section of the internal revenue code, which states that an immediate expenses deduction can be taken by business owners on purchases of various types of business equipment that would be considered depreciable. Keep in mind that this deduction is available to you in the event that the equipment is financed or purchased. Even if you use a credit card to buy the asset, you can claim this deduction.

A few types of depreciable assets include software, equipment, and vehicles. By taking advantage of this tax benefit, your business will be able to reduce the tax liability that you owe for the current tax year. Once you use this option, you will no longer be able to depreciate or capitalize the asset during future tax years. If you decide to use Section 179 on your tax return, keep in mind that max deduction limits exist of $1.05 million. The value of the depreciable property has a max limit of $2.62 million if you want to qualify for the deduction.

How Does Section 179 Work?

While you can take smaller tax deductions over an extended period of time with depreciable equipment, Section 179 allows your business to obtain immediate tax breaks by deducting the entirety of the depreciable value. This particular deduction is available as an incentive that small business owners can take advantage of to further enhance and grow their companies by obtaining new equipment.

As mentioned previously, the only types of equipment that apply for this tax benefit are ones that are considered depreciable assets. For businesses, these assets can include office equipment, cars, computers, and business machinery. If your business has just started and you need to purchase equipment, this deduction can be highly beneficial for your company. Make sure that the purchase price for the equipment you obtain isn’t higher than the dollar amount that’s allowed by Section 179.

Keep in mind that you will need to start using the piece of equipment you purchase in the same tax year that you claim the Section 179 deduction. Any equipment that falls under Section 179 could also qualify for additional depreciation.

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Additional Info About Section 179

As mentioned previously, you can only deduct as much as $1.05 million in depreciable assets for the 2021 tax year. The amount of equipment you purchase for this deduction can’t be higher than $2.62 million if you want to qualify for the tax benefit. These limits can change from year to year.

Any vehicles, software, or equipment that you purchase will need to be used for at least 50% of the time if you want to qualify for this deduction. To obtain this calculation, multiply equipment, vehicle, or software costs by the total percentage of business-use to obtain the amount that can be deducted via Section 179.

To better understand how Section 179 works, let’s say that a company has bought a piece of equipment that’s used solely for business reasons at a price of $60,000 with zero salvage value. It’s possible that the asset would depreciate by $10,000 each year over a six-year period of time. Instead of deducting $10,000 each year, you could deduct all $60,000 in a single tax year.

Using Section 179 on Your Vehicle

There are additional limitations on using Section 179 if you want to apply the deduction to a vehicle. In the past, loopholes were available that allowed companies to write off total costs of certain large SUVs. This specific loophole was closed by limiting the amount that could be deducted with vehicles. Under these limitations, businesses can deduct as much as $11,160 for standard cars and up to $11,560 for vans and trucks. The types of vehicles that could qualify for the complete Section 179 deduction include:

  • Tractor trailers
  • Vans that seat at least nine passengers
  • Heavy construction equipment
  • Cargo vans and similar vehicles that don’t contain seating behind the driver’s seat

By claiming this deduction, your business can benefit from a large tax break that makes it easier to purchase additional equipment. Consider speaking with a tax accountant to make sure that you use this deduction correctly.

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