Recently, we took a look at depreciation and its income tax-required relative, MACRS depreciation. Typically, assets like computers and vehicles purchased for a business are capitalized and depreciated over a set number of years through specific MACRS requirements for federal income tax purposes. However, Section 179 of the Internal Revenue Code allows a taxpayer to elect to treat the costs of certain business assets and expense them entirely in a single tax year, popularly known as the Section 179 Deduction. This deduction is often useful for businesses who would rather entirely expense assets like furniture and computers, rather than depreciate them over several years. It can help with their books & records, or even help qualify them for additional tax credits or deductions. Startup businesses often can benefit from Section 179 Deductions.
Qualifying Property for Section 179
To qualify as Section 179 property, the business asset must be:
- Tangible property (furniture, computers, etc.)
- Purchased for business use
- Used more than 50% in the business
- Not acquired from a related party
Additionally, the asset must be used in the tax year to be claimed for the deduction, not the year it was purchased. Let’s look at an example.
Schultz Startup purchased $2,000 worth of computer equipment for its employees at the end of 2019. However, the business does not start operations until January 2020. Schultz Startup cannot claim the Section 179 Deduction for their 2019 income tax return. They will have to wait until the 2020 filing is due in 2021 to claim the deduction.
The Section 179 Deduction can be claimed on Part 1 of Form 4562, the same form used for MACRS Depreciation.
Some Limitations Apply (Of Course)
The maximum deduction for Section 179 property is $1,040,000 (2020), with a phase-out limit of qualified property expenses beginning at $2,590,000 (2020) and ending at $3,630,000 (2020). Going over the phase-out limit means the deduction will decrease, ultimately shrinking down to zero if the total of purchased qualified property hits $3.63M. The limit is also tied to the net income of the business. Basically, you cannot deduct more in the Section 179 deduction that your business made.
Vehicles receive special treatment in Section 179. SUVs and certain other vehicles are allowed a maximum deduction of $25,900 for each qualified vehicle used for the business.
Startups and emerging businesses can benefit greatly from claiming the Section 179 Deduction. The ability to entirely expense assets like office equipment can help mitigate income tax in the early years as the business grows. Properly planning and claiming the Section 179 Deduction may require some assistance from seasoned tax help, such as us here at MiklosCPA. We are a California-based tax and accounting firm that helps businesses with Section 179 deductions and other tax and accounting issues that emerging businesses often face as they grow. Want to know how we can help? Let’s take some time to chat. In the meantime, check out our social media pages for some additional “good-to-know” tax tips and tidbits.