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Understanding Asset Depreciation and Section 179 Deductions

What Is Asset Depreciation?

You may have heard of the term depreciation, or perhaps you've already used it in a sentence. You may even be aware that depreciation is a method for calculating the cost of an asset over its useful life. What you might not know, however, is how to figure out your own depreciation rate and useful life using Section 179 deductions and asset depreciation.

If you want to understand how these two concepts work together as part of your overall financial picture, read on! We'll explain why it's important to understand both Section 179 deductions and asset depreciation so that you can make better decisions about how best to use them in your business or personal life.

What Is a Section 179 Tax Deduction?

Section 179 is a tax deduction that allows small businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. In other words, you can deduct up to $1 million in equipment purchases—no depreciation deductions required. The catch? You have to have an annual gross receipts under $25 million (this amount is adjusted for inflation).

The IRS defines small business as any entity whose average annual gross receipts for the preceding three years do not exceed $25 million. However, if your business has a change in ownership during this time period, then you must use one of two different tests: either test A or test B. Test A applies if: (1) at least 50 percent of your property was placed into service before January 1st; (2) at least 50 percent of your property can be depreciated under ADS 167; and (3) all depreciable assets are used more than 50 percent for business purposes and are not held primarily for sale to customers.

Section 179 Deduction Limit

The section 179 deduction limit is $1 million. The deduction limit applies to all types of property, including real estate.

You need to keep careful track of the $1 million deduction limit for your purchases. If you go over this amount and don’t pay back the extra money, it will be considered a taxable event and you may owe taxes on it!

Section 179 Eligible Property

The Section 179 deduction is a tax deduction that allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.

The Section 179 deduction is a deduction from gross income, which means it reduces your taxable income.

To qualify as a Section 179 asset, the property must be:

  • Tangible personal property (not real property) placed in service by December 31st.

  • Business use of the equipment must exceed 50%.

  • Acquired by purchase.

  • Tangible personal property. These are items that can be measured, seen, and touched, such as machinery, office furniture, tools, and vehicles; single-purpose agricultural or horticultural structures; storage facilities (except buildings and structural components) used in the distribution of petroleum or any primary product of petroleum; off-the-shelf computer software; and anything else made from plastic.

  • Qualified improvement property. This is an improvement to the interior portion of a commercial building that has already been placed in service. However, it does not include elevators or escalators, enlargement of the building, or changes in the internal structure of the building.

  • Certain improvements to commercial property. These are roofs; heating, ventilation, and air conditioning property; fire protection and alarm systems; and security systems.


We hope this article has helped to clarify the difference between asset depreciation and Section 179 deductions. If you are looking to purchase some equipment to take advantage of the section 179, please feel free to contact our office for assistance.


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