- 2011 Deduction Limit – $500,000 (up from $250k previously). Good on new and used equipment, including new software.
- 2011 Limit on equipment purchases – $2 Million Dollars (up from $800k previously).
- “Bonus” Depreciation – 100% (taken after the $500k deduction limit is reached). Note, bonus depreciation is only for new equipment. This can also be taken by businesses that exceed $2 million in capital equipment purchases.
The above is an overall, "simplified" view of the Section 179 Deduction for 2011. For more details on limits and qualifying equipment, as well as Section 179 Qualified Financing, please peruse this entire website.
An example of Section 179 at work:
What is the Section 179 Deduction?
Most people think the Section 179 deduction is some arcane or complicated tax code. It really isn't, as the following will show you.
Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. Government to encourage businesses to buy equipment and invest in themselves.
Several years ago, Section 179 was often referred to as the "SUV Tax Loophole" or the "Hummer Deduction" because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV's and Hummers) – but that particular benefit of Section 179 has been severely reduced in recent years, see 'Vehicles & Section 179' for current limits on business vehicles.
Today, Section 179 is one of the few incentives contained in any of the recent Stimulus Bills that actually helps small business. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for Small Business – and millions of small businesses are actually taking action and getting real benefit.
Essentially, Section 179 works like this:
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it's true that this is better than no write off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting. That's the whole purpose behind Section 179… to motivate the American economy (and your business) to move in a positive direction. For most small businesses (adding total equipment, software, and vehicles totaling less than $500,000 in 2011), the entire cost can be written-off on the 2011 tax return.
For large businesses adding even more than $500,000, the write-offs are just as substantial. See the following graphic for an example of the savings that is currently available to you after the 'Tax Relief Act of 2010' passed in December 2010.
Limits of Section 179
Section 179 does come with limits – there are caps to the total amount written off ($500,000 in 2011), and limits to the total amount of the equipment purchased ($2,000,000 in 2011). The deduction begins to phase out dollar-for-dollar after $2 million is spent by a given business, so this makes it a true small and medium-sized business deduction.
After passage of the 'Tax Relief Act of 2010', large businesses that exceed the threshold of $2 million in capital expenditure can take a Bonus Depreciation of 100% on the amount that exceeds the above limit. Nice.
All businesses that purchase, finance, and/or lease less than $2 million in new or used business equipment during tax year 2011 should qualify for the Section 179 Deduction. If a business is unprofitable in 2011, and has no taxable income to use the deduction, that business can elect to use 100% Bonus Depreciation and carry-forward to a year when the business is profitable.
Most tangible goods including "off-the-shelf" software as well as business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. For basic guidelines on what property is covered under the Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased must be placed into service between January 1, 2011 and December 31, 2011.
The deduction begins to phase out if more than $2 million of equipment is purchased – in fact, the deduction decreases on a dollar for dollar scale after that, making Section 179 a deduction specifically for small and medium-sized businesses. However, as noted above, large businesses can expense all qualifying capital expenditures with 100% Bonus Depreciation for the 2011 tax year.
What's the difference between Section 179 and Bonus Depreciation?
The most important difference is both new and used equipment qualify for Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only. Bonus Depreciation is useful to very large businesses spending more than $2 million on new capital equipment in 2011; also businesses with a net loss in 2011 qualify to deduct the cost of new equipment.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business has no taxable profit in 2011 (the unprofitable business is allowed to carry the loss forward to future years.)
Section 179's "More Than 50% Business-Use" Requirement
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the $amount eligible for Section 179.