Understanding IRS Section 179 for 2023
Up to 100% Deduction for Software or Equipment Purchases
2023 IRS Section 179 Deduction
The IRS Section 179 Deduction is ideal for small to medium-sized businesses. It allows businesses to write off equipment and software purchases as a tax incentive.
2023 IRS Section 179 At a Glance
The following is an overall, “simplified” view of the IRS Section 179 Deduction for 2023. For more details on limits and qualifying equipment, as well as IRS Section 179 Qualified Financing, please read this entire page carefully.
2023 DEDUCTION LIMIT
This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2023, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2023.
2023 SPENDING CAP
This is the maximum amount that can be spent on equipment before the IRS Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. This spending cap makes Section 179 a true “small business tax incentive”.
Bonus Depreciation is generally taken after the IRS Section 179 Spending Cap is reached.
Essentially, IRS 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 over the next few years. That’s the whole purpose behind IRS Section 179 – to motivate the American economy (and your business) to move in a positive direction. For most small businesses, the entire cost can be written-off on the 2023 tax return (up to $1,160,000).
Recent Changes to IRS Section 179
New in 2020, qualified nonresidential real property improvements can also be claimed under Section 179. This includes:
- interior improvements
- new roofs
- HVAC systems
- fire and alarm systems
- security systems.
Frequently Asked Questions – IRS Section 179 Deduction
The Section 179 tax deduction allows companies to claim the price of equipment and software financed or purchased during that tax year as a business expense. The code allows for the full purchase price of qualifying items to be deducted off the company’s gross income. These deductions are especially useful for small and medium-sized businesses, but also large companies that need a lot of equipment such as heavy equipment, computers and software.
The Section 179 tax deduction was developed to offer an incentive to businesses to upgrade their equipment and services they could offer and invest in themselves. Small businesses are benefiting from this tax credit now more than ever because it is one of the few options available for small businesses and has been included in recent corona virus-related Stimulus Acts as well as federal tax bills.
The reason why the Section 179 tax credit is so valuable to business owners is that previous tax codes only allowed businesses to claim a portion of their equipment purchases every year. Those deductions also had to be spread out over several years and could not be claimed all upfront. The Section 179 tax code allows businesses to be credited the full purchase price of the equipment or software all at once without having to account for depreciation.
There is a cap on the total amount that businesses can claim, however of $1,160,000 with purchasing limited to $2,890,000 in equipment and software. There are also limits to the types of equipment and software that can be claimed under the Section 179 tax deduction.
Any business that purchases equipment that qualifies for Section 179 deduction can receive this tax credit. There are no restrictions on company size or type of company that can take advantage of this great tax credit. Although there are restrictions on how much is allowed to be spent on equipment each year ($2.89 million).
The spending cap for Section 179 IRS tax code says that businesses cannot spend more than $2,890,000 on capital equipment during the tax year if they want to qualify for this deduction. Only $1,160,000 of the amount spent can be claimed under Section 179.
Section 179 requires that any software, equipment, and IT/Computer hardware expensed out under this code be used for business purposes more than 50 percent of the time. If the equipment is 100 percent business use, companies may claim the full price of the equipment.
However, if the software or equipment is only used for business 60 percent of the time while the rest of the time is personal use, only 60 percent of the cost may be claimed under the tax credit.
Many business owners are thrilled to discover that used equipment can be purchased and written off under IRS Section 179. Being able to purchase and expense used equipment is a great benefit to companies because it allows them to purchase more equipment for less while still staying under the spending caps.
Bonus depreciation is only offered for some years. Luckily it is offered for 2023 along with Section 179 tax deduction. Bonus depreciation is a tax credit for company equipment and software as well that used only to cover new equipment; however, in recent years has included some used equipment. Section 179 allows for expensing out used equipment that is purchased as well.
The bonus depreciation tax credit is a big win for large businesses because there is no spending cap on and businesses that operate at a net loss are still eligible to claim some of the equipment cost. These businesses can carry the loss forward into the next tax year but are required to take the Section 179 tax break first, and then Bonus Depreciation is applied. However, if there is no taxable profit, business owners will not be able to take advantage of Section 179, and only the Bonus Depreciation tax credit will be applied.
Vehicles are one of the most popularly claimed expenses under Section 179; however, not all vehicles qualify. There are deduction limits of $11,160 for vehicles that are likely also to be used as personal vehicles.
Some vehicles, such as fleet caravans, cargo vans, refrigerator trucks, delivery trucks, etc., do qualify for a total purchase price deduction, however.
Here are the rules governing how a vehicle qualifies a work vehicle only:
- The van has nine or more passenger seats
- The vehicle has no seating behind the driver such as a cargo van or moving truck
- The vehicle is used for heavy construction such as a forklift
- The vehicle is an over-the-road semi / tractor-trailer
- Shuttle buses
- Modified vans
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the IRS 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 monetary amount eligible for IRS Section 179.
The information provided on IRS Section 179 is informational only and not intended to express a legal view or replace your accounting professionals.
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