As a business owner, you work hard to minimize expenses and maximize profits. However, your expenses also reduce your tax liability, so they can be advantageous in some circumstances. Section 179 gives business owners the right to deduct the full cost of business assets. As a result, this rule can provide you with some substantial deductions. Here’s what you need to know about Section 179.
What is IRS Section 179?
IRS Section 179 of the tax code allows businesses to deduct the full cost of assets the year they’re purchased. However, there are specific regulations governing which assets qualify for this treatment. Section 179 gives business more accounting flexibility, and it can provide substantial deductions.
However, claiming Section 179 isn’t always advantageous. Depending on the circumstances, depreciating an asset can be the better option.
This Section 179 guide will explain everything you need to know about the pros and cons of each process. But first, here’s some more background on standard, non-Section 179 depreciation:
How Does Depreciation Work?
Typically, regulations require businesses to depreciate large asset purchases over several years. Depreciation timelines vary depending on expected use-life, but companies can choose from several accepted methods for depreciating the cost.
Most large assets have expected life spans exceeding one year, and you have to depreciate their cost. As a result, you would only be able to deduct a portion of the purchase expense in each tax year. For example, you could only claim a 20% deduction each year the asset is in use.
Depreciation periods vary depending on the type of asset, as determined by the IRS. Many common assets such as computers, research equipment, appliances, and automobiles fall under a 5-year depreciation schedule, and many consider this to be a safe default for most assets. However, longer-lasting assets like furniture, agriculture equipment, and railroad tracks require 7-year depreciation schedules.
Commercial buildings depreciate over a period of 39 years, while residential real estate uses a 27.5-year depreciation schedule. The IRS also has specialized are separate rules for unique assets like racehorses, motorsport equipment, trees, and dairy cattle.
However, if an asset meets the designated criteria, you can skip the depreciation schedule and deduct the asset’s entire cost in the first year of purchase. You can learn more about depreciation here.
Section 179 vs Depreciation
Section 179 and depreciation are related terms, but they’re not the same thing. Here are some similarities and differences:
Similarities of Section 179 and Depreciation
Section 179 and depreciation both allow you to deduct the cost of purchasing an asset. However, depreciation spreads the cost out over time, while Section 179 allows you to deduct the entire cost at once.
Differences Between Section 179 and Depreciation
Depreciation correlates an asset’s use life with its deductible expense. The idea is that you’ll write off the cost of the asset as you use it. When you use Section 179, you are writing off the entire amount of the asset before you have received the full benefit of owning the asset.
Which one is right for you?
Deciding whether you should take Section 179 or depreciation on an asset will depend on several key factors:
If your current year income is lower than you expect it to be in the future, depreciating its cost might be more valuable. You can’t get a refund for your Section 179 deduction if it puts you into the red for the year. So, it’s often better to save the deductions for later years rather than wasting it on a nullified deduction.
A Holistic View of Your Assets
You can decide whether to take Section 179 on each asset, so you have a lot of flexibility. Make your Section 179 decisions on a case-by-case basis to get the most valuable deduction possible.
Other Special Tax Rules
In recent years, tax laws have allowed bonus depreciation for certain assets that allows them to take 100% of the depreciation in the year of purchase without the limitations of Section 179 depreciation.
Tax rules change frequently, so you should double-check for updates every year. Sometimes, you may find new benefits that were not available in previous years.
What Qualifies as a Section 179 Asset?
Not every asset is eligible to take the Section 179 election. An asset must meet several criteria to qualify for Section 179.
You cannot use Section 179 on non-tangible assets such as goodwill, lease commissions, or loan fees. The asset must exist in a physical form.
The asset must be purchased; you cannot take Section 179 on a leased asset. However, new or used equipment qualifies for Section 179 so as long as the purchased asset is new to you, it qualifies.
Purchased from an Unrelated Third Party
You cannot use section 179 to on assets purchased from a related party (whether that relationship is personal or a related business).
At Least 50% Business Use
This criteria generally comes into play for vehicles eligible for Section 179, but may come into play with other assets as well. A new laptop purchased for the business that is also used for personal purposes would need to be used more than 50% of the time for business purposes to qualify for Section 179.
Section 179 Vehicles
The IRS has specific rules for claiming Section 179 on automobiles. Regulators wanted to ensure the deduction couldn’t be abused, so they set up rules that would prevent business owners from writing off vehicles that aren’t strictly business related.
Although some luxury and personal vehicles can get in under the criteria, most everyday cars won’t qualify under the IRS rules. Furthermore, the IRS places limits on the maximum deduction to prevent businesses from deducting extravagant purchases.
To start, a Section 179 vehicle must have a gross vehicle weigh rating over 6,000 pounds to qualify. GVR equals a vehicle’s curb weight plus it’s maximum payload. So, a pickup truck weighing 4,000 pounds with a 2,500 payload rating would have a GVR of 6,500 and qualify under the Section 179 rules. As with other Section 179 assets, at least 50% of your Section 179-elligible vehicle’s use must be business related to qualify.
If you’re purchasing a new vehicle with the hopes of claiming Section 179, make sure the model and trim you choose fits the criteria. The model vehicle’s GVR can change depending on the trim, feature, and other variables.
Find out more about Section 179 for vehicles.
Other Common Section 179 Assets
This is not an exhaustive list, but the following assets typically meet the Section 179 standards.
- Computer Equipment including computers, printers, copies, and peripherals.
- Furniture including waiting room furniture, desks, chairs, and conference room tables.
- Manufacturing equipment including heavy machinery, specialized production equipment, commercial-grade ovens, and packing equipment.
Section 179 Limits for 2021
The IRs regularly changes the Section 179 limitations so you should review the regulations for each year that you want to claim Section 179.
For 2021, the maximum amount of eligible equipment that can claim Section 179 for an entity is $1,050,000. If you buy more than $2,620,000 of eligible equipment for the year, the eligible amount of Section 179 starts being phased out.
For 2022, the maximum amount of Section 179 expense a company can claim is $1,080,000 if the business is not subject to the phaseout rule.
Section 179 Tax Strategies
Section 179 affects various types of businesses differently.
If you’re a freelancer, you’re probably used to variations in your income. You often don’t know what your total income is until the very end of the year. Because this makes tax planning and estimated tax payment difficult, using Section 179 can help offset this uncertainty.
You can deduct large purchases during high-income years to maximize deductions, or use normal depreciation methods if your income is lower and the deduction won’t have as much of an impact. You don’t have to make the election until the end of the year, and you’ll find that Section 179 is very useful for mitigating unexpected tax bills.
Most people use Airbnb as one of multiple income streams and not their sole source of income. Depending on your total income for the year, Section 179 can be used to lower your AirBnb income in years where your total income is higher.
For Turo hosts, the type of vehicle being purchased to use for hosting should be carefully considered. If you have a single vehicle that you are hosting on Turo that is a large vehicle eligible for Section 179, you may not want to use the deduction in the first year because it may be more than your income from hosting. However, if you have a fleet of vehicles, you can take Section 179 on some vehicles to manage your overall income from the endeavor.
Talk to a Section 179 Specialist
Section 179 tax strategies can be confusing, and deciding whether its the right choice for your business isn’t always an easy call. The correct answer depends on several factors and nuances that can be hard for anyone but a professional accountant to identify. Fortunately, our Shared Economy Tax pros have deep expertise in this area.
If you have questions about Section 179 and how it relates to your business, get started with a one-on-one strategy session with a Shared Economy Tax pro today. We’ll show you how to get the best deduction possible for your large asset purchases.