Fidelity Capital News

The Section 179 Deduction Explained

The IRS’s Section 179 deduction is extremely important for every business owner to understand. As tax season approaches, you should know what this law means, as it gives you access to some outstanding deductions that could save your business money.

Section 179 allows you to deduct the full purchase price of any qualifying equipment that you purchase or finance during the tax year. This tax incentive was originally designed to encourage businesses to invest in themselves by purchasing equipment and supplies they need for their day-to-day operations.

The deduction is extremely beneficial, as without it, you would only be able to write off the depreciating value of these expenses. Either way, you would eventually get the full price back in deductions, but because Section 179 allows you to get back the full amount at once, you don’t have to worry about spreading out those deductions over the course of multiple years.

Qualifying for Section 179

Before your business can leverage the power of Section 179 deductions, you need to be sure that you qualify under the law. For 2013, organizations that purchase or finance less than $2 million in either new or used equipment for their business qualifies. If your business is unprofitable in 2013 and has no taxable income on which to use that deduction, then you can choose to use a 50 percent bonus depreciation toward a year when your business does turn a profit.

This “less than $2 million” requirement is the stipulation of Section 179 that makes it specifically geared toward small businesses.

Any property you wish to deduct under Section 179 must have been acquired for the use of your business and must have been purchased, and not rented. Specific types of eligible property include:

  • Tangible items, such as machinery, equipment, livestock or property contained in or attached to a building
  • Single-purpose agricultural or horticultural facilities
  • Storage facilities used for distributing petroleum products
  • Computer software purchased off the shelf
  • Property used primarily for business purposes (at least 51 percent of the time)
  • Certain types of real property, including qualifying leasehold improvement, retail improvement and restaurant properties

It’s important to note that there are certain types of properties not eligible for deduction under Section 179, including land and improvements and leased, energy and lodging properties.

Deduction limits of Section 179

For 2013, there is a deduction limit of $500,000. This affects the combined costs of all of the businesses you run, and not each individual business. You do not have to deduct the full amount of your expenses, as you can choose how much you wish to deduct under the section’s guidelines. Any unclaimed items must be depreciated.

Additionally, there is a limit on the amount of property that is deductible under Section 179 that you can purchase in a given year. You are required to reduce your Section 179 deductions by a dollar for each dollar that your purchases go above the 2013 applicable limit of $2 million.

Additional limitations of the law

You are not allowed to use the Section 179 stipulations to deduct more in a single year than your net taxable business income for that year. To figure out exactly what your net taxable business income is, simply subtract your business deductions from your total business income. The deductions you subtract should not include Section 179 deductions, your 50 percent self-employment tax deduction or any other operating losses that affect your taxes for that year.

Please note that if you have a net loss for the year, you are ineligible for any Section 179 deductions for that year.

For more information about Section 179 deductions, we encourage you to contact Fidelity Capital. Our financial professionals are happy to discuss these stipulations and how your business can use them to save significant money.