Small and medium-sized businesses use a lot of equipment, such as computers, software, industrial lighting systems and vehicles. In fact, it’s common for companies to purchase equipment continuously throughout the year. From a financial perspective, buying equipment for business owners can get costly. Because of this, Section 179 of the IRS Code was implemented to ease the burden of such purchases and to stimulate the economy by encouraging owners to invest in their business.
This article provides a general overview of Section 179 Deductions. As every business is unique, it is recommended to seek advice from a professional tax preparer before electing to participate in the program.
What is Section 179?
Section 179 is an optional, non-automatic scheme (one must elect for deductions) that allows business owners to deduct the full purchase price of qualifying equipment between January 1 and December 31 of the taxable year. When taking the deduction, businesses must elect to participate in the program during tax return filing for the applicable year.
Below is a list of equipment that qualifies under Section 179 Deduction:
- “Off-the-shelf” software
- Office furniture and equipment
- Business vehicles (gross weight of vessel must exceed 6,000 lbs)
- Tangible personal property used by the business
- Partial business use
- Property attached to the establishment but is not a main structural component of the building
Examples of costs that CANNOT be deducted under Section 179 includes: land (and permanent structures attached to it), business inventory, patents, copyrights, trademarks and property outside of the US.
Equipment Lease under Section 179
Under Section 179, it is possible for businesses to benefit from deductions for qualifying equipment that is financed or leased.
Limitations and Bonus Depreciation Tiers
The total amount that can be deducted under this program for year one is $500,000. For equipment purchases over $2 million (maximum business investment limit), deductions enter “phase-out” or is reduced under a dollar-for-dollar scheme. Up to this threshold, it is possible to get a full deduction for qualifying equipment. It is important to consider that both thresholds ($500,000 and $2 million) are indexed for inflation every 365 days in $10,000 increments, starting this year.
Note: 179 deductions may not exceed the individual’s aggregated income for the applicable year. For example, if the taxpayer’s business income is $90,000 for the taxable year, the individual’s 179 deductions cannot exceed $90,000 for that year. However, it would be possible to carry-over amounts exceeding the taxpayer’s limitation to a future year.
Some equipment, especially heavy duty machines intended for long-term use, may qualify for bonus depreciation. This is applicable for individuals who would like to make deductions for the cost of long-term assets in a single year. In 2015, the government passed the Protecting Americans from Tax Hikes Act (PATH Act), which covers bonus depreciation up to 2019 and details for phase-out during the five-year period:
- 50 percent: 2015, 2016 and 2017
- 40 percent: 2018
- 30 percent: 2019
There are several points to take note of when leveraging bonus depreciations. First, there is no yearly dollar limit for deduction amounts under bonus depreciation. The equipment does not need to be used 51 percent of the time. Bonus depreciation only covers qualified new equipment, while Section 179 Deductions covers qualified new and used equipment. With this in mind, large businesses that exceed the yearly spending limit for 179 deductions may benefit from bonus deprecation. Businesses that incur a net loss during the tax year may also qualify to bring bonus depreciation forward to another year. In most cases, 179 deductions are applied before bonus depreciation, with the exception of businesses without taxable profit in the applicable tax year.
Forms and Expiration Date
Section 179 expires on the midnight of December 31, 2016. Complying with IRS tax regulations typically starts with purchasing qualified equipment (refer to What is Section 179?) that will be used during the year. Don’t forget to keep all records associated with the purchases, including date of transaction, date of usage, receipts/invoices and costs associated with the transaction, such as shipping and installation. When it comes time to elect a 179 deduction, individuals will need to refer to IRS Form 4562. This form will provide the IRS with information about the qualified equipment/property.
Lastly, to ensure maximum benefits and compliance (and as mentioned earlier), it would be best to seek help from a professional tax preparer when filling out IRS Form 4562. This is recommended for businesses with large or complex equipment purchases. Because Section 179 is optional, it would be possible to leave out eligible equipment (purchased within the applicable year) in the filing.
Getting Started with Industrial Lighting Equipment
To get started with benefiting from Section 179 Deductions, it is crucial to purchase and install equipment for your business during the applicable year before electing to participate in the program. This is one of the major prerequisites of the IRS Tax Code. Don’t hesitate to use Section 179 to your full advantage, especially while bonus depreciation rates are in early phase-out.
Larson Electronics offers a wide range of industrial lighting equipment for businesses. Our selection of heavy duty lights, accessories and power distribution systems can help you take advantage of 179 deductions, lower energy costs (LEDs) and reduce time spent on maintenance.
- Class I, II, III, Division 1 and 2
- LEDs, metal halide, fluorescent models
- High bay, tube-style, portable fixtures
- Marine grade, waterproof, shock-resistant
- Extensive selection of energy efficient commercial fixtures
- 50,000+ hour rated lifespan (LEDs)
- Several mounting and voltage options
- Sturdy housings and casings available
- 2-5 stage light masts
- Explosion proof, solar powered models available
- LED and metal halide options
- Easy deployment and storage features
- Skid mounted, temporary and dolly cart mounted
- Battery powered models available
- Explosion proof, weather proof options
- NEMA 3R, UL 1640 approved