The short answer: Section 179 is a part of the tax code amended in the Tax Cuts and Jobs Act (TCJA) of 2017 that deals with tax deductions for assets and equipment purchased by businesses.
According to Section 179’s official website, this tax deduction “allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.”
Here’s everything you need to know to ensure your business gets the highest cash flow increase from these deductions.
How Section 179 Works
Section 179 first came about in 1958, intended as a way to incentivize businesses to invest more of their earnings on goods and equipment.
The goods in question must be used for business a minimum of 50% of the time to qualify for the deduction. The cost can only be deducted in the year the goods were “placed in service.”
Up to $1 million in equipment and business goods can be deducted every year. Businesses can, however, purchase up to $2.5 million in equipment, and have those purchases deducted. The difference is that any amount over $1 million claimed is eligible for depreciation at a 100% rate.
These numbers being in the low millions make this legislation a true small business incentive as larger companies often invest tens of millions of dollars in equipment every year. Not all equipment purchases, however, can be deducted.
Tangible Assets Are Deductible
The IRS defines tangible personal property as tangible property that is not real property. Several different categories of tangible assets are deductible:
Fixtures inside or attached to a building like refrigerators, office equipment, printing presses, testing equipment, and signs
Improvements to the property’s interior, roof, heating, security, and fire protection
Machinery and equipment used for manufacturing, production, or extraction, or to provide transportation, communications, electricity, gas, water, or sewage disposal services
Research facilities needed for business activities
Livestock and cattle, as well as the facilities used for housing livestock and horticulture
The IRS provides a complete list of qualifying property in Publication 946. Tangible assets are only one kind of deductible property.
Certain Types of Real Property Are Deductible
Real property has to be placed into service within the year of the deduction to qualify. This category includes certain leased property, qualified restaurant property, and qualified retail property.
The IRS provides detailed qualifications in their “Special rules for qualified section 179 real property” from Publication 946.
Off-the-shelf Computer Software Is Deductible
In general, “off-the-shelf” computer software that (a) is not custom designed and (b) is available to the general public qualifies for the Section 179 Deduction in the year that you put the software into service.
The software must also meet the following specifications:
It must be purchased or financed with a specific qualifying lease or loan.
It must be used in your business for income-producing activity.
It must have a determinable useful life.
It must be expected to last more than 1 year.
Any custom-coded software does not qualify.
Enjoy Your Extra Cash
Now that you know some of the assets that qualify for Section 179 deductions you can more confidently invest in your business knowing that you won’t have an unpayable tax bill at the end of the year.
Still worried about tax season? Apply these year-end tax prep tips for small business owners.