Section 179 Expensing
Section 179 increases limits on the depreciation and expensing of specific assets, allowing businesses to lower their taxes for the year.
Commonly referred to as Section 179 deduction
Do I Qualify for Section 179 Expensing?
Businesses can use Section 179 to fully deduct the cost of assets purchased during the year, up to certain limits, rather than spread the expense out over multiple years.
2022 Section 179 Expensing Details
Section 179 allows businesses to fully expense an acquired asset (up to certain limits) in the year it is purchased, rather than depreciating the cost over multiple years. Most equipment, off-the-shelf software, furniture and fixtures qualify for Section 179 treatment.
Section 179 Expensing Rules
Under the Tax Cuts and Jobs Act (TCJA), Section 179 increased the expense limit to $1M from $510K. It also expanded to include qualified improvement property and lodging furnishings as eligible assets. The Section 179 limit is indexed for inflation.
Not all assets can be fully expensed in the first year. There are rules that limit how much can be expensed on a vehicle. This includes passenger cars, trucks and vans. A limit exists for vehicles under 6,000 pounds gross vehicle weight (the luxury automobile limit).
Businesses are not required to fully expense an item; they may take only the amount of Section 179 that would be most beneficial for their tax situation and depreciate the balance of the asset.
Section 179 is also limited by the amount of overall purchases made by the taxpayer. The TCJA increased this limit to $2.5M, adjusted annually for inflation. Taxpayers who purchase assets worth more than that must reduce the amount of Section 179 expensing taken by a dollar-for-dollar amount, with no expensing allowed after the purchase cost is equal to the amount of the phase-out floor, plus the Section 179 limit (i.e., $2.5M + $1M.).
Section 179 expensing may be used for property that does not originate its use with the taxpayer, as well as for some types of property that would normally not qualify for accelerated expensing or depreciation, such as HVAC systems.
Potential Downsides of Section 179
There are two potential downsides to taking Section 179 or accelerated depreciation methods:
1. A general principle of tax planning is that a dollar today is worth more than a dollar in the future. Section 179 expensing does allow you to take a greater deduction today, but you will forgo the depreciation expense in future years, perhaps in years where your business is even more profitable.
2. Section 179 may be subject to recapture. So, if you sell an asset in a future year, you may be required to pay tax on the asset that you expensed under Section 179.
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• Businesses can immediately expense long-lived assets.
• Section 179 could be subject to recapture (i.e., you may need to pay tax on an expensed asset if you sell the asset in a future year).
• Current year Section 179 deductions will result in lower future depreciation expenses.
Assumptions When Taking the Section 179 Expensing
• The business will not change the amount of assets being purchased based on the new expense limits under the TCJA.
• The asset was purchased in the current year.
• Bonus Depreciation
Requirements to Claim the Section 179 Expensing
• The assets involved must be eligible for Section 179 treatment.
• The business and overall taxes must be positive and benefit from Section 179 expensing.
Business Entities That Can Claim the Section 179 Expensing
• Schedule C
• Schedule E
• Schedule F
• Farm Rental
• C Corporation
• S Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.