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Section 179: Changes, Restrictions and Tips for Success

31 Oct 2022

Nearing year’s end, the Section 179 Deduction gives business owners a balance sheet tool. Since the 2017 Tax Cuts and Jobs Act, this tax deduction gives businesses the option to deduct the full price of qualifying equipment and/or software purchased or financed during the tax year.  

When businesses can depreciate equipment assets at 100% in the same year they were purchased, their bottom line can improve as the entire cost of buying or leasing new equipment can be deducted. Compared to the standard straight-line depreciation, which businesses use to write off a small portion of qualified property over many years, Section 179 allows a company to deduct the entire cost of an eligible purchase in a single year. 

Section 179 Deductions Increased  

This year, both the deduction limit and spending cap were raised. The Section 179 total spending cap is phased out between $2.7 million and $3.78 million. (In 2021, the spending cap was only $2.62 million.) The deduction limit was also raised again from $1.05 million to $1.08 million, an increase of $30,000 from 2021.

Once a company reaches the spending cap, the deductible amount is reduced dollar for dollar by the amount above the spending cap resulting in zero eligible Section 179 expenses when $3.78 million or more of equipment is purchased. 

Bonus Depreciation Includes Used Equipment

Like 2021, both new and used equipment qualify for the Section 179 Deduction – as long as the used equipment is “new to you.” Bonus Depreciation only covered new equipment in previous years until the Tax Cuts and Jobs Act was enacted in 2018.

Bonus Depreciation is applied after the Section 179 deduction so it can help large businesses spend more than the $2.7 million spending cap but still receive the 100% depreciation rate.

But the Bonus Depreciation is still useful to business owners spending less than $2.7 million on new equipment when the business owners claim a net loss as they could still qualify to deduct a part of the investment and carry forward the loss.

After Jan. 1, the 100% depreciation rate will end. Equipment purchased during 2023 will have an 80% depreciation rate. Then, the bonus depreciation will reduce by 20% each year until 2027.

Review Section 179 Restrictions and Reminders

While claiming Section 179 for eligible equipment is straightforward — as long as businesses have up-to-date records — some restrictions could bar business owners from qualifying:

  • Equipment, vehicles, or software were used less than 50% for business purposes.
  • Equipment was not purchased or leased between Jan. 1 and Dec. 31, 2022.
  • Equipment was gifted or inherited.
  • Equipment used by nonprofits or governmental units.
  • Equipment held by an estate or trust.
  • Equipment used outside the U.S.
  • Equipment used by foreign people or entities.

To set you up for success, read these reminders:

To ensure your equipment, software or vehicles are in service for business purposes more than 50% of the time, multiply the cost of the equipment, vehicles, or software by the percentage of business-use. This will equal the total amount eligible for Section 179.

Form 4562 must be filled out with your taxes to select the Section 179 deduction. List all property, its price, and total deduction claimed under Section 179.

If you’re considering an equipment purchase in the current tax year, you can estimate those savings using the 2022 Section 179 Tax Deduction Calculator.

Section 179 Savings

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The information on this site is provided as customer service by RDO Equipment Co. and John Deere Financial. However, it should not be construed as tax advice. Find the most up-to-date information on Section179.org and speak to your tax advisor to ensure your business gets the most out of these tax-saving opportunities.

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