What is a Section 179 Deduction?

Section 179 Deductions for Business Equipment Purchases
Tetra Images/Getty Images

Update: 1/1/2016: In late 2015, the U.S. Congress increased the limits for Section 179 deductions, increasing the limit permanently to $500,000. 

 

Section 179 Deductions 

Section 179 of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time. Taking a deduction on an asset in its first year is called a "Section 179 deduction." You can see that there is a benefit to taking the full deduction for the cost of the item immediately, rather than being required to spread out the deduction over the item's useful life.

For example, if you buy a computer for your office, under Section 179 you can deduct the full cost of that computer in one year. This also makes sense, because we all know that computers have a short lifetime, or useful life.

So what types of business property does Section 179 apply to? The IRS has two general requirements:

1. The property (called "qualified property") must be "tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business." Land and buildings are not qualified property. 

2. The property must be purchased and put into service in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it in your business. Buying a piece of property and then letting it sit and gather dust doesn't count. 

Annual Limits on Section 179 deductions 

There are annual limits on the amount of Section 179 Deductions.

For 2016 business tax purposes,  the limits are:

  • $500,000 maximum on individual items of new and used equipment and purchased (off-the-shelf) computer software. Read more about the requirements for applying a Section 179 deduction to sport utility vehicles
  • Your business can spend up to a maximum of $2 million on Section 179 equipment. The deduction is reduced above this amount.

    If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct.

    How Section 179 Deductions - How They Work

    1. First, you purchase qualified property and start using it during the year. 

    2. Then, you sit down with your tax professional at tax time. You will need records on date of purchase, date, you started using the property, and all costs associated with the purchase (like freight and setup). 

    3. You add up all the items of personal property that are qualified.  

    4. Then you can take the 179 deduction by electing it (described below). The amount of the deduction is the cost of the property, up to $500,000 for each individual item of property. The total Section 179 deductions for all property can't exceed the $2 million maximum. 

    How to Elect a Section 179 Deduction

    The form used to report information for a Section 179 deduction is IRS Form 4562. This form collects information on business property acquired and put into service (see above). For more details on completing Form 4562, see the IRS instructions for this form. 

    For More Information on Section 179 Deductions

    Get more information on types of property qualified and excluded and other information, from IRS Publication 946: Depreciation. 

    Disclaimer: Section 179 deductions are complicated. The information in this article, and on this site, is not intended to be tax or legal advice. Each business situation is different and tax regulations change frequently. Please consult your tax professional before buying property with the intent to take a Section 179 deduction. 

    Back to All About Depreciation