In the past, when a small business owner purchased a piece of equipment, it was depreciated over time until the full cost of the equipment was eventually realized. This was often problematic in that the accounting needed to keep track of depreciation schedules could be costly. Further, some types of equipment do not have long lifecycles compared to their corresponding depreciation schedules. Section 179 of the IRS Code now allows the tax deduction to be taken immediately, for the full purchase price, in the same year applicable equipment was purchased and put to use.
This rule encourages growth in that now business owners do not have to worry about purchasing new equipment and the associated accounting costs, and applying the rule will also provide them with more immediate cash in hand to invest in the business itself.
Who Can Use the Deduction?
All businesses that purchase new and used equipment can use the deduction. However, the spending cap is 2 million before it is decreased by a dollar-per-dollar amount after that. This is why a section 179 deduction is often called a “true small business deduction.” Large companies that spend more than the spending cap on equipment will not be eligible.
What Equipment Is Applicable?
The deduction can be applied to new, used, or leased business equipment that is purchased or financed and used in your daily business operations. Business equipment includes items such as office furniture, computers, and manufacturing equipment. Also applicable is off-the-shelf computer software so long as it is not custom-coded software. Some vehicles will apply for the deduction if they are used more than 50 percent of the time for business use, but certain other restrictions will apply.
When Should the Deduction Be Used?
You must use the section 179 deduction in the year you purchase the business equipment and put it to use. “Put to use” in this case means that it must be set up and in use by the business during the tax year the business made the purchase and is claiming the deduction. In other words, you may not purchase the equipment, take the deduction, and set the equipment aside to use in another year.
What Forms Are Needed to File?
To file the deduction, you must complete Part I of IRS form 4562 and attach it to your tax return. You will need to identify where you purchased the equipment, the date of purchase along with a receipt, and when you put the equipment into use if not the same day.
A section 179 deduction may benefit your business. If you’ve purchased equipment to which the rule is applicable, consider whether it’s in your business’s best interest to utilize this deduction.