Small businesses must continuously invest in the latest technology to sustain growth and maintain a competitive advantage in often saturated markets.
Investing in cutting-edge business equipment can be expensive, but Section 179 of the IRS Tax Code provides a way to make imaging equipment and other large-scale purchases more affordable.
Eligible businesses can take advantage of this tax benefit by deducting qualifying business equipment and software, resulting in substantial savings during tax time.
Let's explore the Section 179 deduction and discuss how your organization can benefit.
What is the Section 179 Deduction?
Section 179 deduction is a tax incentive available to U.S. businesses, allowing them to deduct the full purchase price of qualifying equipment or software purchased or financed during the tax year. It's designed to encourage small businesses to invest in themselves by purchasing needed equipment and/or software.
For 2023 (taxes filed in 2024), the deduction limit for qualifying equipment purchases is $1,160,000. The deduction limit is the maximum amount that an organization can deduct in a single tax year under Section 179. This means that if a business purchases or finances new or used equipment within the tax year, they can deduct the full cost, up to $1,160,000, from their gross income.
The spending cap, also known as the phase-out threshold, for Section 179 is $2,890,000. This is the total amount of equipment purchased by the business during the tax year. If the total cost of all the equipment purchased exceeds this cap, then the amount of the Section 179 deduction available begins to be reduced on a dollar-for-dollar basis.
For instance, if a business purchases $3 million worth of imaging equipment in 2023, they would exceed the phase-out threshold by $110,000 ($3 million - $2.89 million). Consequently, their maximum Section 179 deduction would be reduced by this overage, bringing it down to $1,050,000 ($1,160,000 - $110,000).
It’s important to note that depreciation and Section 179 have a distinct difference. Depreciation allows businesses to spread the cost of an asset over its useful life, typically several years. Section 179, on the other hand, allows businesses to deduct the full cost of the asset from their gross income in the year it was purchased, providing a much larger tax break upfront.
What Type of Business Equipment Qualifies for Section 179 Deduction?
Qualifying property for Section 179 includes:
Tangible Personal Property - This refers to personal property that can be physically touched, moved, and used in a business. Examples include office furniture, tools, and vehicles used for business more than 50% of the time.
Equipment Purchased for Business Use - This includes machines, printers, copiers, and other tangible goods used in a business. The assets must be purchased or obtained through Section 179 Qualified Financing from an unrelated individual. Property inherited or received from related parties, including siblings, spouses, parents, and charitable organizations, is ineligible.
Improvements to Non-Residential Buildings - This includes improvements such as roofs, HVAC, fire suppression systems, alarm systems, and video surveillance systems, made to non-residential property after the date when the property was first placed in service.
Specific Business Vehicles - Certain vehicles designed to carry more than nine passengers (like shuttle vans) or with a cargo area of at least six feet in length (like certain trucks and vans) also qualify.
Software - Software purchased and put into use in the tax year also qualifies for the deduction. The software must be "off-the-shelf," meaning it is not custom-made, and is available for purchase by the general public. Examples include:
Section 179 Deduction Non Qualifying Property
Use this list to learn more about non-qualifying property. Learn More →
How Your Business Benefits From Section 179
Section 179 allows businesses to immediately write off the full purchase price of qualifying equipment or software in the year it was purchased and put into service. This means you don't have to wait for the depreciation over several years.
By deducting the full cost of your office equipment or software, you reduce the overall amount of taxable income for your business. This can lead to significant tax savings, freeing up cash that can be reinvested back into the business.
One of the major benefits of Section 179 is that it encourages growth and scalability by making it more financially feasible to purchase equipment and technology that will improve efficiency and productivity.
Here are a few ways your business can use Section 179 to improve or scale operations:
- Acquire a production printer to meet increasing client demands
- Replace multiple legacy printers with one versatile color multifunction printer
- Purchase a MOBOTIX video surveillance system to strengthen physical security
- Invest in cybersecurity software to safeguard your data
2023 Section 179 Deduction Calculator
Use this helpful tool to estimate your potential tax savings. Learn More →
How To Claim Section 179 Deductions
Acquiring a Section 179 deduction can be effortless: simply procure eligible assets for your organization and promptly put them to practical use.
Here are a few other steps to consider when claiming your Section 179 deduction:
- Complete the IRS Form 4562
- Maintain proper records for all purchases throughout the tax year
- Identify qualifying equipment and your business's taxable income
Upgrade Your Technology and Software with Section 179
If you've observed that your business equipment is no longer meeting the demands of your organization, it’s time to upgrade. The Section 179 deduction presents a golden opportunity for small businesses to invest in cutting-edge technologies that will keep them competitive and unlock their full potential for success.