Section 179 limit is a part of the IRS tax code and it isn’t as mysterious or as complicated as many people make it out to be.
Section 179 allows your business to benefit from the cost of specific fixed equipment. When you take advantage of this section, you stand a chance of experiencing great tax benefit. Almost all businesses have equipment that depreciates in value with time.
Section 179 gives you the opportunity to realize depreciation deduction in one year rather than deducting the value of equipment over a period of many years. This practice is called first year expensing.
How Does Section 179 Work?
According to the regular depreciation rules, if you decide to make cash purchases on new laptops for all your employees, you would be forced to subtract a part of each laptop’s cost over several years. This means that you would only be able to subtract small amounts of the total cost over the next five years.
Section 179 gives you the chance to immediately subtract the entire cost in a single year rather than have to follow depreciation for a laptop that will become obsolete rapidly. This part of the tax code allows you to benefit from the deduction of expenses all at once even though it does not increase the overall amount you are allowed to deduct in one year.
The reason why the United States government came up with this incentive is to encourage businesses to acquire equipment that can help them run their operations smoothly and invest in themselves.
Section 179 was previously known as “hummer deduction” or “SUV Tax Loophole” because of the frequency with which the tax deduction was employed to write off the buying of vehicles.
Thanks to section 179, small businesses are now able to enjoy the value of reducing costs in a single year for purchase of office equipment, software, machinery, vehicles and other equipment.
Not so long ago, businesses avoided acquiring new equipment because they would have to wait many years before they realized tax benefits in their entirety. Now things are much better and businesses are writing off entire purchases in a single year.
What Are The Limits Of Section 179?
As of 2013, all used and new equipment is entitled for up to $500, 000. If you purchase, lease or finance equipment worth less than $2million you still be eligible for the section 179 deduction. Amounts worth more than $2million have a significant effect on the deduction value.
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In an unprofitable fiscal year, you can carry forward the deduction to the next financial year and still use the 50% bonus depreciation. Usually, all assets are eligible for the deduction provided they meet specific IRS requirements. You must put any equipment that you declare for section 179 deduction into service during the year you declare it on your tax form.
If you purchase equipment worth more than $2million, you won’t benefit as much because it will start to decrease on a dollar to dollar deduction scale. So this tax code stands to benefit small to medium sized businesses only.
Note that you are not allowed to declare an amount exceeding your net taxable income and that in itself is a limit. You can calculate net taxable income by subtracting all deductions except section 179 deduction, net operating losses and employment tax.
What Changes Have Taken Place In Section 179 Limit 2014?
As expected, the IRS changes the benefits that come with Section 179 every year. The deduction limit in 2013 was $500, 000 and in 2014, it will be cut to $25, 000. The purchase limit will also be reduced from $2million to $200, 000. This however is yet to be implemented. So if you plan to use any equipment leasing section 179 calculators to make leasing decisions, you should know that they are still on the 2013 IRS numbers.
Rather than purchasing equipment without knowing if you can deduct your equipment costs, why don’t you take advantage of the section 179 tax deductions? Even though most equipment qualifies for the deduction, you should contact your financial advisor for more details. Here at LeaseQ we provide equipment financing programs to several businesses in North America and many of them have benefited from tax deductions.
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