Global Tax Insights
Section 179 Deduction Guidelines and Bonus DepreciationDecember 13, 2013
Purchasing or upgrading necessary machinery and equipment for business operations or functions are a costly, but essential investments.
Purchasing or upgrading necessary machinery and equipment for business operations or functions are a costly, but essential, investment. Given the sometimes weighty price of these purchases, the Internal Revenue Service allows businesses with eligible purchases to claim certain accelerated depreciation deductions, specifically, Section 179 depreciation deductions and, in some cases, a bonus depreciation credit to help alleviate these costs.
In short, Section 179 of the U.S. tax code permits businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. The tax break is designed as an incentive to companies to invest in themselves and optimize their operations. While the deduction is open to all businesses with qualifying equipment, small business owners with tighter operating budgets may reap greater benefits of deducting the full purchase price from their gross income.
Qualifying purchases and limitations
Only certain types of equipment are eligible for the deduction under Section 179, and are listed as follows:
- Equipment purchased for business use
- Tangible personal property
- Business vehicles with a gross vehicle weight in excess of 6,000 lbs.
- Computer “off-the-shelf” software
- Office furniture
- Office equipment
- Property attached to the building that is not a structural component of the building
Companies considering the benefits should also be informed that qualifying equipment, vehicle or software must be used for business purposes more than 50 percent of the time to qualify for the Section 179 deduction.
The 2013 Section 179 depreciation deduction limit is $500,000 and is reduced, dollar-for-dollar, for amounts of aggregate qualifying purchases above $2 million. So if you have $1.7 million in qualifying purchases, you can expense $500,000. If you have $2.3 million in qualifying items, you can only expense $200,000.
This deduction is an important item to consider as tax years beginning after January 1, 2013 are set to see a sharp decline in the Section 179 depreciation deduction limit. The $500,000 deduction limit is set to be reduced to $25,000 unless otherwise extended by Congress.
Bonus depreciation allows for a 50% depreciation deduction for new qualifying property placed in service during 2013. It’s important to make distinctions between the two, with the most critical difference being new and used equipment qualify for the Section 179 deduction, while only new equipment falls under the bonus depreciation allowance. The bonus depreciation can be useful for companies that exceed the $2 million threshold for purchasing equipment.
Bonus depreciation rules enacted by Congress have always been temporary and after 2013, bonus depreciation is set to expire, unless otherwise extended.
For more information on the Section 179 expense please contact Anthony Mangiarelli, CPA or contact any member of our team at 888-857-8557.