If you’re a landlord who needs to purchase depreciable equipment for your business, you’ll surely benefit from the Section 179 deduction.
When you buy qualifying assets, the Section 179 deduction can save business owners so much money on taxes.
So, what exactly is the Section 179 deduction? Keep reading this article to learn more.
How Section 179 Works
Before Section 179, qualifying equipment had to be deducted a little bit at a time, year after year, through depreciation. If you bought a piece of equipment for your business with a basis of $50,000, for example, you’d get to write off $10,000 every year over the course of five years.
While that’s better than no write-off at all, most business owners would prefer to write off the entire purchase in the year they bought it. This is what the Section 179 Deduction is for.
When you buy qualifying equipment, you can now write off the entire purchase price in the current tax year.
Section 179 expensing helps businesses who need to purchase equipment right now instead of waiting to save up money. For this reason, this deduction was made specifically with small businesses in mind. In most cases, landlords can write off the entire cost of equipment that qualifies (up to $1,080,000).
Under Section 179 and in the year 2022, up to $1,080,000 of qualified equipment can be written off, and the limit for the total amount of equipment purchased is $2,700,000. After a business spends $2,700,00, the deduction is phased out on a dollar-for-dollar basis, meaning that after $3,780,000 in purchases is reached, the entire deduction goes away.
Assuming your business spends less than $3,780,000 purchasing or leasing the equipment, you can deduct most tangible goods, new or used, and select qualified real property.
Here are examples of things that generally qualify for the Section 179 Deduction:
- Equipment and machines purchased for business use
- Tangible personal property used for business
- Business vehicles (with restrictions)
- Off-the-shelf software
- Office equipment
- Office furniture
- Property attached to your building that isn’t a structural component
- Certain improvements such as roofing, HVAC, security system enhancements, and fire suppression.
Here are some rules governing Section 179 expensing:
- The equipment, vehicles, software, etc. must be used for business-related purposes at least 50% of the time. If the property is used for personal purposes 50% of the time or more, it is ineligible.
- You can’t deduct more than your net taxable income in a single year (i.e., your total deductions can’t result in a net loss).
- You must be classified as a rental property owner.
- You must elect Section 179 expensing on IRS Form 4562.
In the past, bonus depreciation used to only deduct 50% of the cost of new property. Now, thanks to the newest tax laws, you can deduct 100% of the cost of qualified assets, which also now includes used equipment.
Here’s how bonus depreciation works: You multiply the cost basis by the bonus percentage listed in the tax code, which gets deducted from your taxes. The 100% bonus depreciation amount that’s currently in effect only stays that way until January 2023.
So how are bonus depreciation and the Section 179 deduction different?
- The Section 179 deduction has a spending cap of $2,700,000, while bonus depreciation doesn’t have an annual dollar limit.
- Bonus depreciation doesn’t require your property to be used for business over 50% of the time unless it’s “listed property” (automobiles, cameras, and specific other kinds of personal property).
- Bonus depreciation can be larger than your business profit.
- When used for one asset, bonus depreciation must be applied to all assets in the same category.
Bonus depreciation is especially helpful for large businesses that spend more money than the limits of Section 179 allow. In general, assets that qualify for the Section 179 deduction also qualify for bonus depreciation.
If you’re claiming 100% in the first year, it’s generally better to claim it under bonus depreciation than Section 179 expensing because there aren’t restrictions on it.
If you decide to claim Section 179 expensing and bonus depreciation for the same asset, then the proper order is Section 179, followed by bonus depreciation, followed by regular depreciation.
The Section 179 Deduction can be extremely helpful for making business purchases, especially for landlords who own smaller businesses. Because Section 179 can change every year, you should act now while you know the generous benefits are available.