This blog was last updated on March 15, 2021.
Tax time will be here before we know it, and it’s time to start sorting through the year’s purchase receipts and figuring out where you can use tax deductions to save. If you’ve purchased, financed, or leased equipment for your business this year, the Section 179 tax deduction could help your bottom line1.
To help you decide whether Section 179 is right for your business, consider the following factors along with your unique business needs. Above all else, be sure to consult with a licensed tax professional before making any decisions1.
What is the Section 179 Tax Deduction?
The Section 179 tax code eases the burden of new equipment purchases on business owners. You can use this deduction to offset the cost of qualifying general business equipment, off-label equipment, software, and other qualifying purchases. Business owners who then buy or rent qualifying equipment may deduct the purchase price of the equipment from their gross income.
The government makes Section 179 available for business owners as a means for them to invest in themselves. As such, most equipment types are covered to help offset the costs of necessary equipment for business owners.
How Does Section 179 Help Me?
It’s simple: the Section 179 tax break can help you as a business owner by lessening the burden of purchasing the new equipment you need to help improve your business or keep things running smoothly.
No matter what industry you’re in, having updated equipment is essential to helping your business grow and succeed. For example, restaurants need their grills to be in top condition, HVAC businesses need their testing equipment to be top-notch, and auto repair shop need hydraulic lifts that never fail.
Unfortunately, with daily wear and tear, essential business equipment can’t last forever. And when it’s time to replace or update the tools you need to keep business operations running as they should, the cost of doing so can be burdensome for some business owners. But, with Section 179, yearly equipment updates or other necessary improvements can become much easier to manage rather than break your budget.
Are There Limits to Section 179?
With Section 179, you can write off the entire purchase price of most qualifying equipment types as long as you purchased the equipment that year. But, there are limits in terms of how much you can write off each year and limits on the total dollar amount of equipment purchased.
For 2020, there’s an upper limit of $1,040,000 in write-offs, and total purchases are capped at $2,590,000. Keep in mind that these stipulations often change every year, so do your research each year to ensure you’re aware of the current details.
What Kind of Equipment Qualifies?
Tongue-in-cheek tax professionals used to call this tax break the “Hummer Deduction” because, after its inception, business owners noticed that it had nearly no restrictions and quickly took advantage of that by writing off expensive company cars—Hummers included.
Nowadays, Hummer deductions are an artifact of the past. But, luckily for business owners, the list of eligible equipment is still quite extensive. In order for a purchase to qualify, the equipment must be used for business purposes for more than 50 percent of the time.
Equipment that qualifies for this tax deduction includes:
- Tangible personal property used for business such as cell phones and similar equipment
- Business vehicles (gross weight must be heavier than 6,000 lbs.)
- Computers and off the shelf software
- Office furniture
- Non-structural building property, such as printing presses or manufacturing equipment
Additionally, equipment doesn’t need to be “new” to qualify. Pre-owned equipment is acceptable, and so is leased equipment, so long as the equipment in question is new to you.
Because of abuse of this deduction in prior years, there are some limitations to what vehicles you can write off. Note that any vehicle you write off must be a vehicle that is specifically used for business purposes, and you’ll need to specify how often it’s used for business purposes in the form of a percentage.
Types of vehicles that meet the criteria include:
- Cargo vehicles without a body section, no seating behind the driver’s compartment, and a fully-enclosed cargo area (e.g., cargo vans)
- Transportation vehicles designed to seat nine or more passengers (e.g., some larger limos, shuttle vans)
- SUVs or crossover vehicles that weigh over 6,000 pounds but less than 14,000 pounds
While the above are among the main details surrounding qualifying vehicles, there are other limitations that you may want to consider. If you’re unsure about the guidelines for vehicles, be sure to consult with a tax professional.
Section 179 and COVID-19
Although COVID-19 has taken a toll on businesses worldwide, business owners looking to participate in Section 179 can still do so as the tax code continues to operate as usual with only a few new details.
Whether you’ve participated in a Payment Protection Program (PPP) loan or other COVID-19 relief programs, your business can still be eligible for Section 179. Additionally, you may consider writing off the following COVID-19-related business purchases:
- Hand sanitizing stations
- Barriers to protect employees and customers
- Temperature readers
- Other related COVID-19 modifications
Despite the effects of COVID-19, there are still options available for businesses looking to claim a Section 179 tax deduction. For more information about tax planning this year, get in touch with a tax professional.
How Do I Apply for the Section 179 Deduction?
You should consult a licensed professional to discuss the process. However, you can get the ball rolling on your own.
- Make sure that you’re saving all equipment receipts between January 1st and December 31st of this tax year, including leased or used equipment receipts.
- Double-check all equipment against the list of material types that qualify (be especially diligent with vehicles, which have the most restrictions).
- Fill out Form 4562, being as detailed as possible about your qualifying purchases and providing full information about business use, equipment type, and cost.
- Gather receipts for any equipment purchases you’re choosing to deduct.
- Have your accountant review your documents before submission to avoid an audit or any costly mistakes.
Make sure that you submit your Section 179 deduction before December 31st, the last day to file for this tax year.
Need a small business loan for last-minute equipment upgrades**? Call Mulligan Funding at 855-326-3564 to discuss your financing options today!
The information shared is intended to be used for informational purposes only and you should independently research and verify.
Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.