Sept. 5, 2021
Section 179 can save you over $350,000 each year. Learn the ins and outs of how to qualify for one of the most favorable tax laws created for small and medium size businesses.
Section 179 Deduction is one of the most popular tax programs, and it is targeted specifically at benefiting small and medium-size businesses. Section 179 Deduction allows businesses to reduce their tax bill in the current tax year when they invest capital into productive assets such as equipment purchases (read more about the history here).
The Section 179 Deduction is a tax law truly targeted at only small and medium-size businesses. The benefit phases out for larger capital purchases above $2.62 million - this means most large companies do not qualify for the deduction.
Under normal tax accounting, most long-lived capital assets (for instance, heavy machinery) are depreciated over many years. This means that normally only a fraction of the purchase price is deducted from taxable income each year (determined by a "depreciation schedule").
Section 179 Deduction is a special tax provision that enables businesses to deduct up to $1.05 million immediately - this means you can receive a large tax bill reduction during the year you purchased the machine (rather than waiting several years).
The heavy equipment industry typically sees a noticeable increase in sales during the fourth quarter as businesses make year-end purchases to optimize their tax bills. Section 179 Deduction plays a large role in this behavior since it is a strong financial incentive to buy new and used equipment.
Most business owners prefer a bird in hand, rather than one that might be caught later on. The value of cash today is higher than the value of getting the same amount of cash spread out over several years because the cash today can be re-invested and earn profits/interest. Getting the tax benefit right away means businesses have more disposable cash flow to continue investing in other productive areas such as employee bonuses, research, expansion, and more.
Section 179 Deduction is good for the economy because it encourages investment into productive assets. Our economy grows and is better off when we buy and use machines that help us do our jobs more efficiently.
Section 179 Deduction is a popular mechanism used by lawmakers to help stimulate the economy and provide incentives to small and medium-size businesses to spend money on productive assets. In the past lawmakers increased the Section 179 Deduction to help boost the economy.
Bonus depreciation is another type of tax incentive, and it can be used in combination with Section 179. Typically tax professionals recommend applying Section 179 first, then bonus depreciation for the remaining balance.
Our team at Equipment Radar created a free spreadsheet for you to download and use to calculate your Section 179 Deduction.
We recommend that you download the Microsoft Excel file above (then you can edit the spreadsheet - the View Only links cannot be edited). You can change the spreadsheet assumptions to fit your business information. The cells that you should change are highlighted in light green.
Congress created the Section 179 Deduction to benefit small and medium-size businesses. In order to qualify for Section 179 Deduction, the business must not spend more than $3.67 million on qualifying equipment each year.
Businesses are able to qualify up to $1.05 million each year for Section 179 Deduction. Once total qualifying equipment reaches $2.62 million, the Section 179 Deduction benefit phases out dollar-for-dollar until it reaches $0 at $3.67 million.
The chart below helps you visualize how the benefit phases in and out at various levels of purchases.
Source: Equipment Radar and IRS
Takeaway: The Section 179 Deduction benefit phases out dollar-for-dollar above $2.62 million.
It is important to note that the benefit resets each tax year. You must check your eligibility each year. If your business spends more than $2.62 million but less than $3.67 million in one year on machinery, you might be able to optimize your tax strategy by splitting up your purchases between two tax years. You should consult a tax accountant for all final advice.
Section 179 |
The IRS maintains guidelines for Section 179 Deduction (the actual tax form can be found here). You should review IRS guidelines and forms each year since the laws are fluid and evolve over time. Generally speaking, the deduction amount tends to rise over time to account for broader economic inflation.
You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You can also depreciate certain intangible property, such as patents, copyrights, and computer software.
To be depreciable, the property must meet all the following requirements:
Generally speaking, most agriculture and construction equipment including tractors, combines, planters, sprayers, dozers, loaders, excavators, etc qualify. These are all productive assets used with a business to generate income.
Businesses renting equipment do not qualify for Section 179 Deduction. Equipment rental companies do qualify since the IRS states that only the business that owns the equipment can use the deduction.
One item that people often overlook is that Section 179 Deduction is not limited to physical goods. It can also be applied to intangible property such as computer software.
The IRS does not allow land/farmland depreciation because land does not wear out, become obsolete, or get used up. The cost of land generally includes the cost of clearing, grading, planting, and landscaping.
Although land/farmland cannot be depreciated, you can still depreciate many land preparation costs, such as landscaping costs, incurred in preparing land for business use. These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.
The IRS has specific guidelines on Sport Utility and Certain Other Vehicles. When Section 179 Deduction was first enacted it did not have specifications limiting vehicle purchases - as a result, many large SUVs qualified for the deduction. Business owners were able to purchase and write off large GM Hummers and Ford Expeditions. Since then, the IRS added specific guidelines addressing on-road vehicles:
"You cannot elect to expense more than $25,900 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service in tax years beginning in 2020. This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight."
You bought and placed in service a used Caterpillar D8 crawler dozer costing $150,000. The machine is used 100% for business, and the total machinery purchase for the year is under $1.05 million. You can apply 100% of the Caterpillar D8 crawler dozer cost.
IRS guidelines state that you must allocate a percentage split to equipment used for both business and personal use. For instance, if you buy a used John Deere 120R Compact Tractor costing $10,000 for use to perform commercial landscaping work 80% of the time and tasks around your home the remaining 20% of the time, then you can only apply $8,000 (80% * $10,000) toward Section 179 Deduction.
Owners of equipment are able to use Section 179 Deduction. As a result, only the rental equipment company can use the deduction for the power generator. The person or business renting equipment is not qualified to use Section 179 Deduction.
It is important to note that persons or businesses renting equipment are often able to categorize the expense as "Rental Expense" and deduct the full amount from their taxable income each year.
The Section 179 Deduction applies to both new and used equipment. As a result, when you buy a new John Deere 870G excavator you are able to apply the total amount to Section 179 Deduction because the acquisition cost is below the $1.05 million threshold.
The IRS treats both new and used equipment about the same with respect to the Section 179 Deduction.
Machinery can be heavy and expensive to move - especially cranes. When you buy a new or used crane, you will likely incur transportation costs to move the crane from the purchase location to your rental yard or equipment warehouse.
Under most circumstances, the transportation costs can be included in the purchase price as part of the "acquisition costs". So, when you buy a used Grove rough terrain crane from a seller 2,000 miles away, you can include your freight and transportation costs related to your purchase as part of the total purchase price.
We wrote this blog post to help you better understand Section 179 Deduction and how it applies to buying equipment. We are not tax experts, nor are we licensed to provide tax advice. You should always consult a professional tax accountant for all matters regarding your taxes. We cannot be held accountable or responsible for your tax matters.
Laws change over time, and so do interpretations of the law. Tax professionals follow these changes and will help you navigate the legislative environment.