- October 17, 2022
- Posted by: Gunveen Bachher
- Category: U.S Taxes and Businesses
The Sec 179 depreciation is a tax incentive given by the IRS to encourage businesses to invest in themselves by purchasing new equipment.
The Section 179 deduction applies to tangible personal property, residential real estate, and some components of the non-residential property as well. A few examples are given below:
- Machinery and equipment, purchased for use in a trade or business,
- Roofs; heating, ventilation, and air-conditioning property.
- fire protection and alarm systems; and security systems.
- SUVs, trucks, heavy equipment etc.
Maximum allowable limit: $1.08m in 2022
Note that the IRS requires Section 179 depreciation to be calculated before The 100% Bonus Depreciation. (Oh no, yet another type of depreciation. Please don’t get bogged down. Keep reading!)
Here’s an example to help you understand:
Mr. A and Ms. B started a pizzeria and purchased commercial ovens and other kitchen equipment worth $2,500,000.
The deductions for their business would look something like this in their first year of operations.
Equipment Purchase Price $2,500,000.
- Maximum allowed Section 179 write-off ($1,080,000).
- Bonus depreciation for remaining cost ($1,420,000)
Total write-off in year one ($2,500,000).
Net income has now been reduced by the full purchase price of $2,500,000. Let’s assume a corporate tax rate of 21%. By using both deductions, the pizza place has just reduced net income by the full purchase price of $2,500,000. Multiply that by the 21% tax rate for a savings of $525,000.
Bottom line: You can write off most of your business assets either in the first year itself or in the first few years using the Sec 179 deduction, or the 100% bonus depreciation. You also have the option of using the normal depreciation or even a cost segregation too.
You just need to be careful of the asset class and its associated depreciation rate.
Remember that Sec 179 and bonus depreciation has its limitations while writing off residential and non- residential structures, its components, and improvements too.
- You should take the Sec 179 deduction first before you take the 100% bonus depreciation (that is in case you are thinking of taking both). You can choose to ignore both deductions and go for the ordinary, normal depreciation.
- Sec 179 helps you write off tangible § 1245 property that is purchased for use in the active conduct of a trade or business. (Code §179(d)(1)