Section 179 of the IRS tax code was created by the U.S. government as an incentive to encourage businesses to buy equipment and invest in themselves. It allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. If you buy (or lease) a piece of qualifying equipment, you can deduct the full purchase price from your gross income.
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.
When your business buys certain types of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example). For most small businesses, the entire cost can be written-off on the 2016 tax return (up to $500,000).
2016 Deduction Limit = $500,000
This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2016, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2016.
2016 Spending Cap on equipment purchases = $2,000,000
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. This spending cap makes Section 179 a true “small business tax incentive”.
Bonus Depreciation: 50% for 2016
Bonus Depreciation is generally taken after the Section 179 Spending Cap is reached. Note: Bonus Depreciation is available for new equipment only.
Here is an updated example of Section 179 at work during this 2016 tax year.
The advantage to leasing or financing equipment and then taking the Section 179 Deduction is that you can deduct the full amount of the equipment, without paying the full amount this year. The amount you save in taxes can actually exceed the payments, making this a very bottom-line friendly deduction.
For more details on limits and qualifying equipment, as well as Section 179 Qualified Financing, please review with your accountant.