IRS Section 179: The Tax Code's Secret Handshake (Shh!)

As prices of goods, services, and practically everything else have risen over the past few years, small businesses need to take advantage of every opportunity to save money.  In a few rare instances, spending money up front so that you can save more on the back end can be a crucial way to balance your books.  One of the best ways to realize significant savings in the purchase of a new bus, shuttle, or van, is to use the IRS allowances to reduce your overall costs associated with the purchase. The following information should help you easily understand how to make the IRS work for your business.

IRS Section 179 at a Glance for 2023:

2023 Deduction Limit: $1,160,000

2023 Spending Cap on equipment purchases: $4,050,000

Bonus Depreciation for 2023: 80%

What is the Section 179 Deduction:

Section 179 of the IRS tax code simplifies tax deductions for businesses. It lets you deduct the full purchase price of qualifying equipment(including buses, vans, and shuttles) and software, whether new or used, in the tax year you buy or finance it. Essentially, this encourages businesses to invest in themselves by lowering their taxable income.

How Section 179 Works:

In the past, businesses spread equipment costs over years through depreciation. Section 179 changes that, allowing businesses to deduct the entire purchase price in the year they buy the equipment. This encourages immediate investment and has benefited many companies and the economy as a whole.

Limits of Section 179:

There are limits to Section 179. For 2023, the deduction is capped at $1,160,000, and it phases out after $2,890,000 in equipment purchases. This makes it ideal for small and medium-sized businesses.

Who Qualifies for Section 179:

Most businesses that buy, finance, or lease equipment during 2023 qualify for the Section 179 Deduction (if spending stays below $4,050,000). This deduction applies to most tangible business assets, including software and some vehicles. Equipment must be put into service between January 1, 2023, and December 31, 2023.

Section 179 vs. Bonus Depreciation:

Section 179 allows deductions for both new and used equipment. Bonus Depreciation, currently at 80% for 2023, generally applies to new equipment but now includes used equipment as well. It's more useful for large businesses exceeding the Section 179 Spending Cap or businesses with net losses. Section 179 is typically taken before Bonus Depreciation unless there are no taxable profits.

Section 179 Requirements:

To qualify for the Section 179 Deduction, the equipment, vehicles, or software must be used for business purposes more than 50% of the time.

These provisions aim to incentivize businesses of all sizes to invest in their growth and productivity by providing tax benefits for qualifying purchases.  When businesses re-invest, they tend to expand, hire more employees, and grow their business.  This interests the IRS because it helps individuals obtain jobs(and pay taxes) and the business increase its sales(and pay more taxes).  So while at the outset this might seem altruistic, it's essentially making sure the government has more streams of income.  Nevertheless, it is better to use it than not.

DISCLAIMER:  We are not tax advisors, accountants, or even business managers, and suggest that you consult a professional before you undertake anything discussed in the article above.   To contact a representative to help you understand your options, please fill out a form here.