Section 179 and Writing Off Business Equipment

When your business buys equipment - a laptop, a delivery van, an espresso machine, a piece of shop machinery - you don't have to wait years to get the tax benefit. Under Section 179 of the tax code (and, alongside it, bonus depreciation), you can often deduct some or all of the cost in the year you start using the equipment, instead of spreading it out. Here's how the two systems work, what qualifies, and the traps to watch for.

Two ways to deduct the cost of equipment

When you buy something that will last more than a year - equipment, machinery, vehicles, furniture, computers - the tax law generally treats it as a capital asset rather than a simple expense. That means the default rule is depreciation: you deduct a portion of the cost each year over a "recovery period" the IRS assigns to that type of property (for example, several years for most equipment), reflecting the idea that the asset is wearing out or being used up over time.

Section 179 and bonus depreciation are exceptions that let you accelerate some or all of that deduction into the first year instead:

• Section 179 is an election you make, asset by asset, to expense the cost of qualifying property immediately rather than depreciate it. It comes with a dollar cap and an income limit (both explained below).
• Bonus (or "additional first-year") depreciation applies a percentage, set by law, to the cost of eligible property, on top of or instead of Section 179. It generally isn't limited by your business income, and historically the percentage has changed with new legislation - it has been increased, phased down, and reset at different points over the years.

Because both the Section 179 dollar limits and the bonus-depreciation percentage are set by Congress and change - sometimes on a yearly inflation adjustment, sometimes because of new tax legislation - this guide deliberately does not print a current-year number for either one. Before you plan around a specific figure, confirm it on irs.gov, in IRS Publication 946, "How To Depreciate Property," and the instructions to Form 4562, which is the form used to claim both deductions and make the Section 179 election.

What kind of property qualifies

In general, Section 179 and bonus depreciation are available for:

• Tangible personal property used in your business - machinery, equipment, computers, office furniture, and similar items.
• Off-the-shelf computer software that's readily available for purchase and not custom-developed.
• Some business vehicles, though passenger vehicles are subject to their own, generally lower dollar limits that also change over time, and heavier vehicles (like certain trucks and SUVs above a weight threshold) can be treated differently.
• Certain qualifying improvements to nonresidential real property, in some circumstances.

Land, buildings themselves (as opposed to certain interior improvements), and property you don't own aren't eligible the same way. If you're not sure whether a particular purchase qualifies, Publication 946 has the details, or ask a CPA - this is exactly the kind of judgment call where a professional pays for themselves.

The business-use requirement

To use Section 179 (and to avoid recapture later, discussed below), the property generally must be used more than half the time for business, not personal use. If you buy a computer or a truck that's used both for the business and personally, you can only base the deduction on the business-use percentage, and you need to be able to show what that percentage is - through a log, calendar, or similar record - if the IRS asks. Mixed-use property, especially vehicles, is one of the more commonly scrutinized areas on small-business returns, so keep contemporaneous records rather than reconstructing them later.

The income limit on Section 179 - and how bonus depreciation is different

Section 179 has a built-in guardrail: your deduction cannot exceed your business's net taxable income for the year (before figuring the Section 179 deduction itself), with a couple of technical adjustments the instructions walk through. If your business had a loss, or income too small to absorb the full deduction you'd like to claim, the unused portion doesn't disappear - it carries forward to be used in a future profitable year.

Bonus depreciation doesn't have that income cap. It can be taken even if it creates or adds to a business loss. Because of this difference, the IRS generally has you apply Section 179 first (subject to its income limit), and then apply bonus depreciation to what's left. Many small businesses end up using a combination of the two, along with ordinary depreciation on anything left over - which is exactly the kind of multi-part calculation a CPA or tax software handles well.

The recapture trap

The upfront deduction under Section 179 (and, in some cases, bonus depreciation) is a benefit that assumes the property will keep being used mostly for business for a meaningful part of its useful life. If that assumption breaks - because your business use of the property drops to half or less before the end of its normal recovery period, or you sell or otherwise dispose of the property early - you may have to recapture part of the deduction. In practice, that means reporting the difference between what you deducted and what ordinary depreciation would have allowed as taxable income in the year the business use drops or the asset is disposed of.

This is easy to overlook. A common example: a business elects Section 179 on a vehicle, then a year or two later the owner starts using it mostly for personal errands, or the business closes and the vehicle is sold. Either can trigger recapture. If you're planning to sell equipment, change how you use it, or wind the business down, it's worth checking the recapture consequences before you act - and if the business is closing because of debt problems rather than a simple sale, that's a good moment to also look at how business debt and any personal guarantees are handled, which is a separate topic our bankruptcy and debt coverage addresses in more depth.

What to do

1. Keep purchase records for any equipment, software, or vehicle you buy for the business: date placed in service, cost, and how you'll use it.
2. Track business-use percentage from day one, especially for anything also used personally (vehicles most commonly). A simple mileage or usage log is far easier to keep contemporaneously than to reconstruct at tax time.
3. Before you file, confirm the current-year Section 179 dollar limit, the phase-out threshold, and the current bonus-depreciation percentage on irs.gov (Publication 946 and the Form 4562 instructions) or with your tax preparer - do not rely on last year's numbers or a number you saw in an article, including this one.
4. Compare expensing now versus depreciating over time with your CPA if the choice is close - accelerating the deduction isn't automatically better for every business, especially one that expects higher income (and a higher tax rate) in future years.
5. Report the election properly on Form 4562, filed with your business's timely filed return (including extensions); the specific filing deadline for your business depends on your entity type and tax year, so confirm it on irs.gov or with your preparer rather than assuming a date.
6. If circumstances change - you sell the asset, your business use drops, or the business closes - ask your CPA whether recapture applies before you file that year's return.

A note on how this fits with the rest of your tax picture

Section 179 and bonus depreciation reduce your business's net income, which in turn can affect other calculations tied to that income, including the self-employment tax you pay on your net earnings and any qualified business income deduction you're eligible for. They interact with how you're taxed based on your business structure - a sole proprietor, a partner, and the owner of an S corporation or C corporation each report and claim these deductions somewhat differently. If your equipment purchases are large relative to your business, it's worth a conversation with a CPA about timing purchases, the election itself, and how it flows through to your personal or business return.

This article is general information, not legal, tax, or financial advice, and does not create an attorney-client or accountant-client relationship. For guidance on your specific situation, consult a qualified CPA or tax attorney, and confirm current figures directly on irs.gov.