If you’re self-employed or a business owner and you haven’t heard of the Section 179 deduction, it’s time to get familiar with it, because the Small Business Jobs and Credits Act of 2010 has increased the thresholds on this valuable tax deduction for 2010 and 2011.
What is the Section 179 deduction?
The Section 179 deduction allows you to deduct purchases for equipment that is used in your business in full (as expenses) instead of depreciating them slowly over time.
To make things more clear: Without the deduction, you would have to deduct portions of, say, a computer that you purchased for your business over a time period of several years. The technical term for deducting portions of equipment purchases over several years is called depreciation. With the Section 179 deduction, you don’t depreciate equipment purchases, you deduct them in full.
What are the limitations on the deduction?
There are a few limitations on the deduction:
- First, you cannot deduct more than $500,000 for you business during 2010 and 2011. If you have more than $500,000 in expenses, consult your tax preparer, because you could qualify for bonus depreciation on the excess expenses.
- Second, the deduction will start to phase out dollar for dollar on all expenses over $2,000,000. For example, if you have $2,100,000 in qualifying expenses, you would only be eligible to deduct $400,000 in expenses ($500,000 less the $100,000 excess over the $2,000,000 threshold).
What expenses qualify?
Luckily, most depreciable property qualifies for the deduction. Almost everything you use in your business is considered depreciable property: the computer you type on, the desk your computer is on, the chair you sit in, the cabinets you store your files in, etc. Here’s a list of common qualifying equipment:
- Machines purchased for business use
- Computer software (including off-the-shelf packages)
- Office furniture
- Office equipment
- Certain vehicles (limitations apply)
Let’s say that you bought 10 computers, 10 software packages for those computers, 15 desks, 15 chairs, and five file cabinets for your office this year. You can deduct the entire amount of all of these purchases—as long as the total amount is less than $500,000. As I’m sure you’ve figured out by now, the Section 179 tax deduction is great for small businesses.
What expenses don’t qualify?
Even though most business equipment expenses are deductible, there are still those expenses that don’t qualify. The major expenses that do not qualify for the deduction are:
- Real property (buildings, land, or anything attached to the land, like parking lots)
- Air conditioners and heaters
- Furnishings used in hotels, motels, and other places used for lodging
- Property outside of the United States
How do you claim the deduction?
Claiming the Section 179 deduction is relatively simple. First, you’ll need to fill out Form 4562. The Section 179 deduction is completed in Part 1 of the form, so if this is the only depreciation deduction you plan to claim, you’ll only need to fill out Part 1.
The amount that you calculate in Part 1 of Form 4562 is then carried over to your Part 2 on your Schedule C: Profit and Loss from a Business form.
Overall, the deduction is beneficial to small and medium sized businesses. It’s a really great deduction to take advantage of over the next few years while the thresholds are so high and it should prove to be a great stimulant for our economy.
Have you or are you planning to claim the Section 179 deduction for your business? Do you think the deduction has helped your business if you’ve previously claimed it?