What Is IRS Section 179 and How Can It Help Small Businesses?
When you're starting a business, it's easy to get overwhelmed by all of the tax-related terminology. You might have heard about something called an IRS Section 179 deduction, but you're not exactly sure what it is or how it works. That's OK! Today we'll cover everything you need to know about the IRS Section 179 deduction and why it's such a helpful tool for small businesses who want to write off their purchases and reinvest in their business in the year they make them.
What Is an IRS Section 179 Deduction?
The Section 179 deduction is a tax break that allows small businesses to deduct the full purchase price of certain property, such as equipment or vehicles, in the year it was purchased.
This means that you can write off your entire purchase without having to depreciate it over several years. You’re allowed to deduct up to $1 million of qualifying business property in one year under this provision.
It might sound like something only big corporations would care about (and they do), but if you have a small business and are looking at purchasing new equipment for 2022, Section 179 could be helpful to you as well!
How Does an IRS Section 179 Deduction Work?
You’re probably familiar with the concept of a tax deduction, but if you aren't, here's an easy way to think about it: Tax deductions reduce the amount of taxable income that you report on your taxes. For example, if your business' taxable income is $100 and its total deductions are $50 (including Section 179), you don't owe any taxes on that $50 since it was deducted from what would have been your taxable income.
The IRS Section 179 deduction allows businesses to deduct a portion of the purchase price of qualifying assets in the year they were purchased. This can be helpful because businesses get to deduct most—if not all—of those costs right away instead of spreading them out over time through depreciation or amortization deductions. This helps cut down on paperwork and saves money by eliminating some forms altogether!
What Can Be Claimed Under IRS Section 179 Deductions?
Section 179 can be used to make a major impact on your bottom line. We're talking about $1,000,000 worth of equipment! That's right—$1 million dollars in deductions, which means a lot more money back in your pocket.
Section 179 is the most valuable tax deduction available to small businesses because it allows you to deduct the entire cost of qualifying property from your gross income for the year (up to certain limits). Basically, this means that you can write off any business equipment that was purchased or financed during 2018 up until Dec 31st 2023 without having to depreciate each item separately over several years as an expense on your taxes.
What Are the Benefits of IRS Section 179 for Your Business?
So you’ve decided to buy some new equipment for your business. But what does that mean for you and for your company?
You can deduct the full purchase price of equipment and software in the year it was purchased. This means that you can use all of these deductions in the first year, which will help reduce your taxable income for tax purposes.
These purchases qualify as a “Section 179 Deduction” which means that they are treated as capital assets instead of ordinary expenses. Most equipment is considered depreciable property, but under Section 179 rules it may be treated as non-depreciable property if certain requirements are met (see below).
Equipment that qualifies includes tangible personal property such as machinery, furniture and fixtures used in manufacturing; office machines; computers; computer software; land improvements made by farmers who grow crops or raise animals on the land they own; buildings used in mining exploration or development (including structures erected by mine operators on a site leased from another person) ; drilling rigs and oil field service rigs used mainly to explore or develop oil wells but not including drilling rigs included within any other category above; water wells drilled by others where title to such land has been acquired through foreclosure proceedings on a debt secured by such land pursuant to 10 U.S., Code §l066(e)(2)(B)(ii).
Are There Disadvantages to the IRS Section 179 Deduction?
There are a few disadvantages to the IRS Section 179 deduction:
If your business isn’t profitable, you can only claim the deduction if you have taxable income.
You can only claim the deduction if you have not claimed it in previous years. For example, if your company purchased and used $50,000 worth of equipment during 2017 and then sold that equipment at a loss next year, they cannot take advantage of this deduction because they were previously able to deduct all of these costs as capital expenditures on their tax return. Similarly, businesses must be able to prove that the equipment was purchased and put into service during the tax year before being able to deduct it under section 179 expensing (businesses often keep receipts for this purpose).
Conclusion
There’s no denying that the IRS Section 179 deduction is a godsend for small businesses. It can help you write off your purchases and reinvest in your business, which means more money in your pocket and less paperwork. The best part is that it doesn’t matter what type of business you have—you can claim it on just about anything! If you are in the market to purchase some equipment and want to learn more about how this deduction works or whether or not it will benefit your business, give us a call today. We’re happy to answer all of your questions over the phone or by email so don't hesitate to contact us today!