What is Section 179?

If watching your tax deductions crawl in over decades feels like waiting for paint to dry, buckle up—Section 179 is the fast-forward button your small business has been craving.

As a small business owner, you know that every dollar counts. When you invest in equipment, technology, or vehicles, you’re not just spending money—you’re building the foundation for growth. But traditionally, the IRS requires businesses to depreciate large asset purchases over several years, delaying your ability to claim their full value as a tax deduction. This slow drip of deductions can strain cash flow, especially for businesses needing to reinvest quickly to stay competitive. 

Enter Section 179: a powerful tax provision that lets you deduct the entire cost of qualifying assets in the year they’re purchased or financed. This isn’t just about saving money—it’s about accelerating cash flow, reinvesting in your business, and staying agile in a competitive market. 

Let’s break down how Section 179 works, what assets qualify, and how to leverage this deduction to strengthen your bottom line. By the end, you’ll understand why this tax tool is a cornerstone of strategic financial planning for small businesses. 

What is Section 179? 

Section 179 is a provision in the U.S. tax code designed to incentivize businesses to invest in equipment, software, and other tangible assets. Enacted in 1958 and expanded over the years, its primary goal is to stimulate economic growth by reducing the upfront cost of capital investments.  

Instead of spreading deductions over 3–20 years (via depreciation), Section 179 allows you to expense 100% of qualifying purchases upfront, reducing your taxable income for the current year. 

This provision not only simplifies tax filing but also improves cash flow, enabling businesses to reinvest in their operations more quickly. 

Purpose: 

• Encourage business investment: By lowering the immediate tax burden, businesses can allocate more resources to growth. 

• Simplify tax planning: Accelerating deductions reduces long-term recordkeeping complexity. 

• Level the playing field: Smaller businesses gain the flexibility to compete with larger corporations. 

What's the difference between Section 179 and bonus depreciation?

Both Section 179 and bonus depreciation serve as tax incentives to encourage business investment by accelerating depreciation. However, they differ in several key aspects: 

• Application Scope: Section 179 is primarily beneficial to small and medium businesses due to its purchase limits, while bonus depreciation is available to all businesses, including large corporations, and is particularly useful for very large purchases that exceed the Section 179 limits. 

• Phasing Out: Bonus depreciation is currently phasing out, reducing from 100% in previous years to 60% in 2024 and 40% in 2025, making Section 179 a potentially more attractive option as these changes take effect. 

• Usage: Section 179 must be applied first, and any remaining basis in the asset can then be eligible for bonus depreciation, providing a layer of strategic tax planning for businesses. 

Here’s how they compare: 

For more detailed comparisons and examples, the IRS guidelines on Section 179 and bonus depreciation provide a comprehensive overview and our Tax Reference Guide provides updated values and additional information too.

When to Choose Section 179 

• You’re purchasing used equipment (e.g., refurbished machinery for a manufacturing startup). 

• Your business has taxable income to offset (e.g., a landscaping company with steady profits). 

• You’re below the annual spending threshold ($3,050,000 in 2024). 

When to Choose Bonus Depreciation 

• You’re buying new assets and expect a net loss (e.g., a tech startup investing heavily in R&D). 

• You need to deduct long-term assets (e.g., solar panels depreciated over 20 years).
  

Key Takeaway: With bonus depreciation phasing out, Section 179 is becoming the go-to strategy for businesses prioritizing flexibility and long-term planning. 

Which assets qualify under Section 179? 

Understanding which assets qualify under Section 179 can help businesses make informed purchasing decisions. Eligible assets typically include: 

The IRS allows deductions for assets used more than 50% for business purposes. Common examples include: 

• Machinery & Equipment, such as ovens for a bakery, tractors for a farm, or 3D printers for a prototyping studio.
  • Excludes assets used for lodging or entertainment (e.g., a hotel’s furniture). 

• Office Furniture, such as desks, conference tables, ergonomic chairs, or security systems. 

• Technology, such as computers, servers, off-the-shelf software (e.g., QuickBooks or Adobe Creative Cloud).
  • Excludes custom software developed for your business. 

• Vehicles, such as heavy SUVs, trucks, or vans over 6,000 lbs. (subject to a $28,900 deduction limit in 2023).
  • Excludes passenger vehicles under 6,000 lbs. (standard depreciation applies). 

For IRS vehicle guidelines, see Publication 463. 

Exclusions: 

• Real estate (buildings, land, permanent structures). 

• Inventory or assets held for resale. 

• Leased assets (unless structured as a lease-to-own agreement).  

Note: Leased property can also qualify, provided the lease agreement meets specific criteria, making it essential for business owners to structure their leases correctly to take advantage of this deduction. 

What are the annual deduction limits? 

The deduction limits under Section 179 adjust annually for inflation, supporting small and medium-sized businesses in managing their capital expenditures more effectively. 

• 2023: The maximum deduction is $1,160,000, with the phase-out threshold starting at $2,890,000 of total qualifying equipment placed in service during the year. 

• 2024: The maximum deduction increases to $1,220,000, with the phase-out threshold beginning at $3,050,000. 

• 2025: The maximum deduction is further increased to $1,250,000, with the phase-out threshold beginning at $3,130,000.

NOTE: Keeping an eye on Section 179 limits as you plan your year's asset purchases is more than just good practice—it's essential. These caps ensure smaller businesses get a fair shot at significant tax savings, ensuring that the bigger players don't scoop up all the benefits. So, it's wise to stay informed and use these rules to your advantage, especially as you gear up to make those big buys that can help grow your business. 

*Maximum Deduction: The total amount you can claim within the year. 

*Phase-Out Threshold: The total cost of purchased equipment beyond which the maximum deduction begins to reduce. 

Examples for Understanding Deduction Limits

Example for 2023: 

If you spend $1,500,000 on qualifying equipment in 2023, you can claim the maximum allowed deduction of $1,160,000. 

Example for 2023 (Phase-Out): 

If your expenditure on qualifying equipment reaches $3,000,000 in 2023, the deduction would be: 

Deduction: $1,160,000 - ($3,000,000 - $2,890,000) = $1,050,000. 

Important Notes

❗No Losses Allowed: Section 179 cannot be used to create or increase a business loss. If the application of Section 179 would result in a loss, the deduction must be reduced accordingly, with any unused portion eligible to be carried forward. 

❗Income Cap: The total deductions under Section 179 cannot exceed your business's taxable income for the year. For example, if your taxable income is $800,000, that would be the maximum allowable Section 179 deduction you could claim. 

Are there business size restrictions? 

Section 179 is tailored for small to mid-sized businesses, enabling them to deduct the full purchase price of qualifying equipment and software. While there is no direct revenue cap affecting eligibility for Section 179, there is a phase-out threshold that effectively places a limit on the deduction based on the total amount of qualifying purchases. 

How do I apply for Section 179?

Step 1: Track Expenses

• Document Purchases: Keep all receipts, invoices, and detailed records of qualifying purchases. 

• Organize Financials: Use accounting software to categorize and track expenses related to qualifying assets, ensuring accuracy and ease of access during tax filing. 

Step 2: File IRS Form 4562

• Complete Form Details: Fill out Part I of IRS Form 4562 to claim your Section 179 deduction. This section requires detailed information about each asset, including descriptions, costs, and the percentage of business use. 

• Prepare for Filing: Gather and review all documentation related to the assets to ensure completeness and accuracy of the information reported on the form. 

Step 3: Attach to Tax Return 

• Integrate with Annual Filing: Attach the completed IRS Form 4562 to your business’s annual tax return, such as Form 1120 for corporations, ensuring that it accompanies all other required tax documentation. 

• Submit Tax Return: File your tax return by the appropriate deadline, including all necessary forms and attachments. 

Pro Tip: Consider consulting with a tax professional to navigate complex issues such as asset classification, expense categorization, and calculation of deduction phase-outs. This can help avoid common pitfalls and ensure you maximize your tax benefits. 

Are there any downsides to Section 179?

While Section 179 offers significant tax advantages, there are potential downsides to consider, such as: 

• Depreciation Recapture: This could occur if the asset is sold for more than its adjusted basis, resulting in additional tax liability. 

• Planning Challenges: Utilizing Section 179 for immediate tax relief can affect future tax years, as it reduces the amount of depreciation that can be claimed in subsequent years. 

• Income Requirement: Startups or businesses with losses can’t benefit immediately. 

• Complex Compliance: Misclassifying assets (e.g., claiming ineligible real estate) can lead to audits. 

The bottom line

Section 179 is a powerful tool for small businesses seeking to improve their profitability through strategic tax planning. By understanding eligibility rules, deduction limits, and strategic timing, you can turn major purchases into immediate tax relief. 

As with any tax-related decision, it is advisable to consult with a tax professional to ensure compliance and to tailor strategies to your business's specific circumstances.