The Election to Expense Certain Depreciable Business Assets, also known as Section 179, was originally enacted by Congress in 1958. However, this provision has changed repeatedly over the years, and continues to evolve to address business needs. Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to deduct the cost of specific types of property as an expense, rather than requiring the property cost to be capitalized and depreciated. It was created as an incentive to encourage companies to invest in themselves and their business. Section 179 is one of the few government programs created to incentivize small business, and millions of SMB companies are benefitting from the act.
How Section 179 Works
Traditionally, when businesses bought or leased qualifying equipment, the expense was written off through depreciation – a little at a time. For instance, if a company spent $75,000 on a machine, it maybe able to write off $15,000 a year for five years. While most business owners would agree that depreciating assets was better than having no write-off at all, they typically prefer to write off the entire cost for the tax year they bought it.
Section 179 did exactly that – it allowed a business to write off the entire purchase price of qualifying equipment for the current tax year. This had a significant impact on the small business economy, as companies invest in infrastructure now instead of waiting. However, there are limits to the program, and as of 2023, the benefit is being gradually eliminated.
Section 179 Limits
Section 179 does come with limitations – there are caps to the total amount written off ($1,160,000 as of 2023), and limits to the total amount of the equipment purchased ($2,890,000 in 2023). The deduction begins to phase out after $2,890,000 is spent, and the entire deduction is eliminated once $4,050,000 worth of purchases have been made. All companies that purchase, finance, and/or lease new or used business equipment during tax year 2023 should qualify for the Section 179 Deduction, as long as they expend less than the stated $4,050,000.
Most tangible products utilized by U.S. businesses – including “off-the-shelf” software and company vehicles – qualify for Section 179 if they were purchased and placed into service between January 1, 2023 and December 31, 2023.
Section 179 of the IRS tax code once permitted companies to deduct 100% of the purchase price of qualifying equipment or software purchased or financed during the tax year. In 2023, the percentage dropped to 80%, and it will continue to drop by 20% until it is eliminated unless the law is once again revamped.
Therefore, companies can write off 80% of their purchase made during the 2023 tax year, but it is dropping to 60% in the 2024 tax year. This means that small business is losing a significant benefit associated with purchasing their own new equipment – and managed services may be able to step in and bridge that gap.
How Does This Affect Small Business?
Being able to write off 80% of a new (or new-to-you) purchase is a significant benefit, but the equipment must be put into service before December 31, 2023 – and that window is shrinking. . Eligible purchases made and put into service after January 1, 2024 will be subject to a benefit of only 60%. Eligible purchases include:
- Machinery and equipment
- Office equipment and furniture
- Computers and “off-the-shelf” software
- Property attached to a building such as refrigerators, signs, and air conditioners or heaters
- Eligible improvements to non-residential buildings like security systems
How can you offset the loss of the benefits of Section 179?
At Alliance IT, we are committed to helping you to maximize your IT budget, by providing resources and infrastructure through managed services – and thus more affordably. With the Section 179 tax benefit shrinking, it will once again become more expensive to purchase new equipment. If you are looking for ways to optimize your budget while remaining more competitive than ever, we can be your partner in reaching that goal. Call today to learn more about our managed cloud services, as well as a host of programs designed to help you succeed.
