Small Business Accounting:

How Small Businesses Benefit From the Section 179 Deduction

To take advantage of the section 179 deduction, you have to buy property or equipment and place it into service the same year for your business. You cannot claim deductions for equipment you used last year for personal purposes and now are using for business. The maximum section 179 deduction for this year is $20,000. The limit on the investment for the property starts at $200,000 and ends at $220,000 for the year 2000. If the cost of your property or equipment that you bought this year and put into service exceeds $220,000, you don’t get a section 179 deduction.

For e.g., if Tom bought a tractor trailer for $217,000 in June 2000 and put it into service the next day, the only deduction he can claim is for $3000. What the IRS does is that it takes the amount that is over $200,000, in Tom’s case $17,000, and subtracts it from the maximum deduction allowed for that year, in the year 2000 the deduction is $20,000.

(Maximum deduction allowed) – (amount over maximum investment allowed) = Section 179 Deduction
$20,000 - $17,000 = $3000

The advantage here really lies for small businesses. For small businesses that have property or equipment in service that is constantly breaking down on them, instead of repairing the product or equipment, they can buy replace it and get up to $20,000 deducted from their taxable income.

IRS has outlined the property that can qualify for section 179 deductions. Remember if you buy something with a trade-in plus cash, then the only thing you can claim deduction on is the cash that you paid for it, not the value based on the trade-in. The properties are:

  • Tangible personal property (Machinery and equipment).
  • Other tangible property (except buildings and their structural components) used as:
    1. An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
    2. A research facility used in connection with any of the activities in (a) above, or
    3. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.
  • Single purpose agricultural (Livestock is a qualifying property. Livestock includes horses, cattle, hogs, sheep, goats, and mink and other fur bearing animals. Also if the structure is used to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs.) Or horticultural structures. A horticultural structure can be any of the following:
    1. A greenhouse specifically designed, constructed, and used for the commercial production of plants.
    2. A structure specifically designed, constructed, and used for the commercial production of mushrooms.
  • Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

There is also an issue of the partial business use of a qualified property. If you only use the property 60% of the time (the property has to used at least 50% for business to qualify), and the cost of the property is $10,000, then your section 179 deduction is equal to $6000 (.60 X $10,000).

Properties that don’t qualify for section 179 deduction are:

  • Property that you manufacture or produce and lease to others.
  • Property that you purchase and lease to others if both of the following apply.
    1. The term of the lease (including options to renew) is less than half of the property's class life.
    2. For the first 12 months after the property is transferred to the lessee, the total business deductions that you are allowed on the property (other than rent and reimbursed amounts) is more than 15% of the rental income from the property.

Remember to file for section 179 deduction using the form 4562. File for this deduction the same year you purchase and put into service the qualified property. And if in the next couple of years you decide to no longer use the property for business purposes, but for personal use then you might have to recapture some of the deduction. You do this by subtracting the depreciation value from the deduction that you received and including it as your taxable income. If you have to recapture deduction in the second year then the depreciation value is 50%, in the third year it’s 33.3%, and fourth year it’s 25%, and so on.