Businesses can treat certain assets to be expensed in the year they are purchased instead of requiring them to be depreciated over time. This is beneficial because the tax savings is immediate and the deductions are not spread out over several years. The part of the internal revenue code that allows this is called Section 179 Deduction. Small business owners should be aware of the Section 179 deduction and learn how to maximize it to reduce their current year taxable income. The Section 179 deduction changed significantly for tax year 2015 going forward. Remember that the Section 179 deduction can change at anytime going forward.
What is a Section 179 Deduction?
Section 179 of the IRS Tax Code allows a business to deduct, for the current tax year, the full purchase price of financed or leased equipment and off-the-shelf software. There are certain requirements that must be met in order to take a section 179 deduction. For example, the equipment purchased, financed or leased must be within the specified dollar limits of Section 179, and the equipment must be placed into service in the same tax year that the deduction is being taken.
Using the Section 179 Deduction Small Business
To be expensed under the Section 179 rules, the asset must be used primarily (more than 50%) for business purposes. If a portion of its use is for non-business purposes then only the pro-rated ratio of business use can be deducted. Nearly every depreciable asset that you would buy for your business is eligible for the Section 179 Deduction. Unlike bonus depreciation, the 179 Deduction is allowed for both new and used assets (bonus depreciation can only be taken for new items).
2015 Section 179 Deduction
For tax year 2014 this means the equipment must be put into service between 01/01/2014 and 12/31/2014. All businesses that purchase, finance, and/or lease less than $2,000,000 in new or used business equipment during tax year 2014 should qualify for the Section 179 Deduction.
Information about 2015 Section 179 Deduction
2015 Deduction Limit = $25,000
This is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2014, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2014.
2015 Limit on equipment purchases = $200,000
This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis.
Bonus Depreciation: not available in 2015
This is taken after the $200,000 Section 179 cap is reached. Note: Bonus Depreciation is available for new equipment only. In prior years, Bonus Depreciation would be taken after the Section 179 Spending Cap is reached. Note: Bonus Depreciation was available for new equipment only; in 2015, Bonus Depreciation is not available at all.
Section 179 Deduction in 2015 and Beyond
Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps small businesses. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses – and millions of small businesses are actually taking action and getting real benefits. All businesses that purchase, finance, and/or lease less than $200,000 in new or used business equipment during tax year 2015 should qualify for the Section 179 Deduction.