Bonus Depreciation: Why Section 179 is Worth Your Time Asset Strategy

The pandemic brought with it a boom in entrepreneurship. Since 2020, applications to start new businesses have skyrocketed, reversing a decades-long slump, according to Forbes.[1] It’s well known that the process accompanied by opening a business typically isn’t seamless. So, if you are a business owner yourself or are hoping to become one in the future, it’s worth looking into Section 179.

The Basics

As stated by Investopedia, Section 179 of the U.S. internal revenue code is “an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time.”[2] Essentially, this tax deduction allows businesses to, with limitations, write off the taxes associated with a qualified asset during the first year it was purchased and put to use. It’s important to note that all material purchased under Section 179 must be used for business purposes more than 50% of the time to qualify for the deduction. [2]

For example, if you bought a laptop for each of your employees, you’d be forced to deduct a portion of each computer’s cost over multiple years under the regular depreciation rules. For the next five years, as a business owner, you would be able to deduct only a fraction of the overall expense. Lucky for you, that’s where Section 179 steps in! This section allows the immediate deduction of the entire expense in a single year – that way, you don’t need to keep note of the devaluation of a laptop that likely will not last a lifetime. While this section of the tax code doesn’t increase the total amount you can deduct in a single year, it allows business owners to optimize their tax situation. [2]

 A Tax Deduction Discussion

Section 179 was designed to help small businesses invest in themselves and, in turn, the American economy. The significant tax savings afforded by this deduction can often be a deciding factor for businesses debating whether or not to invest in eligible property that might help them grow. [3] There are, however, a few limitations to how much a company can spend on property or materials in one calendar year. For instance, during the 2023 tax year, companies can deduct no more than $1.16 million in the total cost of eligible property, as per Investopedia. [2]

Fortunately, using Section 179 is relatively straightforward. In order to write off items in the first year it was purchased, you must include Form 4562 with your taxes and elect Section 179 deduction. [3] You’ll need to curate a list of the items or property you are claiming and provide the cost, as well as the amount you plan to deduct. If you would like to explore your options or discuss Section 179 further, reach out to our team for a complimentary meeting.

 

[1] https://www.forbes.com/sites/franksorrentino/2022/05/24/small-business-booms-post-pandemic–new-ways-of-doing-business/
[2] https://www.investopedia.com/terms/s/section-179.asp
[3] https://www.businessnewsdaily.com/5476-section-179.html


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