Small Business Equipment Purchases Under Tax Code Section 179
Section 179 allows a small business to recover all or part of the cost for equipment and furnishings in the year they are purchased and put into service.4 min read
3. What Equipment Does Not Qualify?
4. Considerations for Equipment Leased to Others
5. How Much Can Be Deducted?
6. The Business Income Limit
Claiming Section 179 for Your Small Business Equipment Purchases
Section 179 allows a small business to recover all or part of the cost for equipment and furnishings in the year they are purchased and put into service. This tax deduction on equipment purchases can be elected instead of recovering the cost via depreciation.
Below is a brief summary of the main points of Section 179 and how it can be applied to your small business equipment purchases. (For full details on the Section 179 Tax Deduction, check out the IRS's Publication 946.)
- The equipment must be acquired for use in your trade or business.
- When your equipment is for both business and personal use, you can claim the section 179 deductions only if you use the equipment more than 50% of the time for your business in the year you place it in service. To figure your section 179 deduction, multiply the cost of the equipment by the percentage of business use.
- The equipment must have been acquired by purchase. This includes equipment acquired through equipment financing or credit.
- Section 179 can only be used for “tangible personal property.” It Includes the following:
- Machinery and equipment.
- Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.
- Off the shelf computer software.
- Gasoline storage tanks and pumps at retail service stations.
- Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals.
What Equipment Does Not Qualify?
- Any equipment acquired through an equipment lease where your small business will not own the equipment at the end of the lease term.
- Equipment that you will be leasing to others. (See section below.)
- Equipment that was acquired by gift or inheritance.
- Equipment that was purchased from a family member may not qualify. Ask tax consultant for further details regarding your specific circumstances.
- Air conditioning or heating units.
Considerations for Equipment Leased to Others
Generally, you cannot claim a section 179 deduction for equipment that you will be leasing to someone else. This rule does not apply to corporations. However, you can claim a section 179 deduction for the cost of the following property:
- Property your small business manufactures or produces to lease to others.
- Property you purchase and lease to others if both the following tests are met:
- The term of the lease (including options to renew) is less than 50% of the property's class life.
- For the first 12 months after the equipment or property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property.
How Much Can Be Deducted?
The total amount you can elect to deduct under section 179 for most equipment placed in service in 2007 generally cannot be more than $125,000. If you acquire and place in service more than one item of qualifying equipment during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $125,000.
If you deduct only part of the cost of qualifying equipment as a section 179 deduction, you can generally depreciate the cost you do not deduct.
If you purchase equipment with a combination of cash and a trade-in, you can only claim the section 179 deduction for the cash you paid.
If the cost of your section 179 equipment placed in service exceeds $500,000, but is below $625,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $500,000.
You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year.
The Business Income Limit
The total amount you can deduct each year after you apply the dollar limit is limited to your taxable income from the active conduct of any trade or business during the year.
Any cost not deductible in one year under section 179 because of this limit can be carried over for an unlimited number of years until you have enough taxable income to realize the full value of the claim.
Note: It should be noted, that if you have a C-corporation, an LLC, an S-corporation or a partnership, you may be able to utilize a Section-179 deduction in both your business' taxes and your personal income taxes. Many states also allow smaller deductions, so be sure to consult with your tax consultant.
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