What Is a Section 179 Expense Deduction?
A Section 179 expense deduction, which allows businesses to deduct the purchase price of certain equipment, reduces federal income tax liability. Instead of depreciating the purchase over time, businesses can use Section 179 to deduct the price of equipment, whether purchased or financed, in the tax year in which it was bought. It is meant, in part, to stimulate the economy for businesses.
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Active Use
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The Section 179 deduction applies to property that the taxpayer uses to conduct business. This does not include investment properties that the taxpayer purchases and plans to sell later if they appreciate, but does not actively manage. The taxpayer must actively use the property by providing goods or services to customers. According to the Internal Revenue Service, property that the owner rents to tenants only qualifies for this deduction if rental payments are the owner's main source of income.
Deduction Increases
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Economic stimulus laws have increased the Section 179 deduction. According to the University of New Hampshire, the American Recovery and Reinvestment Act increased the deduction from $133,000 to $250,000 in 2009. According to Ohio State University, the Small Business Jobs Act of 2010 further increased the deduction to $500,000 for 2010 and 2011.
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Asset Selection
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When a taxpayer selects the Section 179 expense deduction, the taxpayer can decide which assets to apply the deduction to. According to the University of New Hampshire, if a farmer purchases a tractor and a truck and claims the deduction, the farmer can select how much of the deduction to apply to each vehicle. This is important because different pieces of equipment, such as a tractor and a truck, may have different depreciation periods, according to IRS rules. The farmer can assign the deduction to a vehicle with a longer depreciation period to receive the greatest immediate benefit.
Limit
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The Section 179 deduction includes an investment limit, so a business owner who purchases capital equipment worth more than the investment limit can claim a smaller deduction. Because of the limit, this deduction is more useful to a small business than a large business. The University of New Hampshire says the limit is a dollar-for-dollar reduction, so if a business owner purchases property worth $50,000 more than the investment limit, the amount the business owner can deduct under Section 179 is reduced by $50,000. According to Ohio State University, the Small Business Jobs Act of 2010 increases the investment limit from $800,000 to $2 million for 2010 and 2011.
Significance
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Increases in the Section 179 reduce the total cost of purchasing new equipment for a business, since the business will receive a large, immediate tax deduction. Lawmakers want to encourage businesses to purchase machinery and vehicles so they will be able to operate more effectively in the future. According to the United States Senate, Section 179 is one of the most common deductions that small businesses claim.
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References
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