Section 179 in the IRS tax code allows small business owners to file deductions for the depreciation of their assets. The more you use your assets—like equipment, technology, and vehicles—the less value they have for resale. This depreciation means you’re less likely to recoup the costs of your investment and may need to buy new equipment when the existing assets break.
As a business owner, you can calculate the depreciation of your assets to save money on your taxes. Learn more about Section 179—and how to fill it out—below.
What Assets Qualify for Section 179?
While your small business can certainly benefit from Section 179, there are some guidelines to keep in mind when determining which assets qualify for depreciation deductions. First, any items you plan to deduct through Section 179 must be used for business purposes more than 50% of the time.
This requirement is mostly relevant for business owners with home offices or who have assets, like vehicles, that they also use for personal use. When calculating Section 179, consider the percentage of professional use for an item to determine the percentage of depreciation you can deduct.
Additionally, the maximum you can deduct for depreciation in 2021 is $1,050,000. This restriction means the limit on equipment purchases that you can deduct is $2,620,000, if you wish to qualify. While this might not affect most small business owners, it can change the purchase plans of some medium-sized companies. You may want to spread out when you buy certain assets and push investments to the next tax year in order to stay under this limit.
A few years ago, some executives started referring to Section 179 as the “Hummer Deduction,” or the “SUV Tax Loophole,” because it allowed business owners to buy large, expensive vehicles and deduct a sizable portion of them from their taxes. However, new restrictions limit the amount you can deduct for cars, trucks, or vans to prevent people from buying luxury vehicles and deducting them as business expenses. Exceptions are made for ambulances, hearses, large transport vans, and work trucks modified for the business.
Check to see if there are other specific deduction limits for certain assets before you try to list them on Section 179.
How Different Depreciation Methods Affect Your Taxes
As you review Section 179, you’ll realize that the depreciation methods you choose will change the amount you can deduct each year. For example, with straight-line depreciation, you will deduct a flat amount of money each year until your asset is only worth its salvage amount. This option is favored by tax preppers who like consistency and want to guarantee a certain deduction amount in the future.
With the double-declining balance method and the IRS MACRS method (more on that below), you will deduct more in the short run to account for the immediate declining value of an asset. These methods are ideal if you want to save more on your taxes immediately, recouping your costs faster. It does mean, however, that you won’t be able to deduct as much in future years for that asset.
Your bookkeeping team and your tax accountant should be able to advise you on the best depreciation method for your business so you can get the most out of Section 179.
Where Can You Learn More About Section 179?
If you really want to dig into Section 179, the IRS has several pages of guidelines related to depreciation and how to calculate it. You can use Publication 946 (which also comes in PDF form) to identify the types of assets you own and how to calculate depreciation for them. This publication can help you to determine the expected life of your assets (which depends on the type of equipment and your industry), the rate of depreciation for those assets, and which exclusions apply.
Publication 946 was created to help business owners calculate their deprecation more accurately through MACRS, the Modified Accelerated Cost Recovery System launched by the IRS in 1986. This depreciation-calculation system favors higher deductions in the short run by depreciating items faster, allowing business owners to recoup their investments in a timely manner. However, Publication 946 can be a useful guide no matter the depreciation method you use.
Learn More About Available Deductions
Taking advantage of Section 179 can help you to recoup the costs of the equipment you use within your small business. This deduction is just one of many that can help you save on your taxes if you’re a small business owner.
To learn more, check out our Tax Assist guide at Sunrise. We have a dedicated checklist to follow when preparing your taxes and a tax estimator to help you understand what you owe. With our tools, you can file your taxes accurately this year—and you may be able to save money through various deductions and tax credits.