Section 179 Tax Deduction Overview

People complain about our tax system.   I actually like our system.  It favors those who know the rules.  My favorite tax rule can be found in IRC Section 179 tax deduction.  This section of tax code defines the accelerated deductions available for tangible personal property used for business use.  It is a great way for the government to help you purchase the capital equipment you need to run your business.  Section 179 is part of the stimulus package enacted in 2008 and it keeps getting extended.  You immediately can claim up to $25,000 deduction on a Section 179 qualifying vehicle.

Section 179 Limits

The yearly Section 179 tax deduction limit is $500,000 per year.  You may purchase up to $2,000,000 of qualifying property each year.  The bonus deprecation has been extended.  It is 50% in 2016 and 2017, 40% in 2018 and 30% in 2019.

Business Income Sources

1)     Net income or loss from your business

2)     Net income or loss from the spouses business

3)     Proceeds from the sale of assets from you and your spouse’s business

4)     Interest income from you and your spouse’s business

5)     Net income or loss of your rental property business

6)     Gains or losses from the sale of rental property which qualify for section 1231

7)     And finally, you and your spouse’s other W-2 earned income

That is a lot of income.   I purposefully saved the W-2 income for last.  It is the source of the most confusion (I must reiterate here that I always advise using a tax specialist.  I do not give tax advice.)

Married Tax Payers and Section 179

The IRS treats you and your partner as single taxpayer when you file jointly.  If you file separately, you must declare how you are going to account for the Section 179 deductions.

Section 179 Example

Your business has $10,000 income for the year and your spouse earned $75,000 in W-2 income.  You buy a qualifying SUV for $37,500.  Your total income is $85,000.  You deduct the maximum allowed $25,000 for the vehicle. You are under the $500,000 limit.  Your taxable income is now $60,000.  If you are in the 30% tax bracket, you just saved $7,500 in federal income taxes. 

Section 179 is a rule you definitely want to know, understand and use.  It will help save you tens of thousands of dollars in your business.  

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