Section 179 doesn’t increase the total amount you can deduct, but it allows you to get your entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset’s useful life. This is called first-year expensing or Section 179 expensing. (Expensing is an accounting term that means currently deducting a long-term asset.)
Example
In 2023, Bill buys a $25,000 van for his delivery business. Under the regular depreciation rules, Bill would have to deduct a portion of the cost each year over its five-year useful life. By deducting the van under Section 179, Bill can deduct the entire $25,000 expense from his income taxes in 2023. So he gets a $25,000 deduction in 2023 under Section 179, instead of the normal deduction he would get using regular depreciation methods. The maximum Section 179 deduction in 2023 for vehicles 6,000-14,000 pounds is $28,900.
What Property Qualifies
You qualify for the Section 179 deduction only if you buy long-term, tangible personal property that you use in your business more than 50% of the time. Under Section 179, you can deduct the cost of tangible personal property (new or used) that you buy for your business. Examples of tangible personal property include computers, business equipment and machinery, cell phones, etc.
Property Used Primarily (51%) for Business
To deduct the cost of property under Section 179, you must use the property primarily for your business. The deduction is not available for property you use solely for personal purposes or to manage investments or otherwise produce non-business income.
You can take a Section 179 deduction for property you use for both personal and business purposes, as long as you use it for business more than half of the time. The amount of your deduction is reduced by the percentage of your personal use. You’ll need to keep records showing your business use of the property. If you use an item for business less than half the time, you will have to use regular depreciation instead and deduct the cost of the item over several years.
Another limitation regarding the business use of property is that you must use the property over half the time for business in the year in which you buy it. You can’t convert property you previously used for personal use to business use and claim a Section 179 deduction for the cost.
Annual Deduction Limit
There is a limit on the total amount of business property expenses that you can deduct each year under Section 179. The maximum in 2023 is $1,160,000 with a phase out threshold beginning at $2,890,000. Once you're above $4,050,000, no Section 179 deduction is allowed.
You don’t have to claim the full amount, it’s up to you to decide how much to deduct under Section 179. Whatever amount you don’t claim under Section 179 must be depreciated instead over the life of the asset.
Advantages and Disadvantages of Taking Section 179
The main advantage of Section 179 is it lets you take a higher deduction immediately. By receiving a higher depreciation deduction today, a business will reduce its current tax bill. This deduction is especially helpful for new businesses that may be having cash-flow troubles. Section 179 lets businesses maximize deductions today and avoid delaying deductions to the future when the business may no longer exist.
Two of the major disadvantages are as your income increases, it will move into a higher tax rate. By accelerating your business's deductions, you will have fewer options in the future to reduce your taxes when your business may be in a higher tax bracket.
Another disadvantage of the accelerated method is that it has a greater risk of recaptured depreciation. You may decide to sell a long-term asset before it is considered worthless according to its depreciation schedule. If you sell the asset for more than its current accounting value, your profit will be considered recaptured depreciation. The IRS will take back your depreciation deductions as the asset did not lose as much value as planned. Your recaptured depreciation profits will be taxed as income. Accelerated depreciation systems have a higher cost of recaptured depreciation because they recognize more depreciation upfront.
Proper planning can help you make the best possible decision on depreciation. Call your business service provider today to discuss your current situation and your future business plans in order to make a sound decision on depreciating your business assets.