"What is" Section 179

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 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. It is sometimes referred to as the "SUV Tax Loophole" or the "Hummer Deduction" because many businesses have used this tax code to purchase qualifying vehicles (like SUV's and Hummers.)

Essentially, Section 179 works like this:

When your business buys certain pieces 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 vehicle, 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 2010), the entire cost can be written-off on the 2010 tax return.

For businesses adding even more than $500,000, the write-offs are still substantial. See the following graphic for an example of the savings that is currently available to you after the 'Small Business Jobs and Credit Act of 2010' passed in September 2010.

Limits of Section 179 (updated as of Sep 27, 2010) 
Section 179 does come with limits - there are caps to the total amount written off ($500,000 in 2010), and limits to the total amount of the equipment purchased ($2,000,000 in 2010.) The deduction begins to phase out dollar-for-dollar after $2 million, so this makes it a true small and medium-sized business deduction.

After the very recent passage of the 'Small Business Jobs and Credit Act of 2010', businesses that exceed the $2 million in capital expenditure threshold can take a bonus depreciation of 50% on the amount that exceeds the limit. And then also take normal depreciation on the rest. Nice. ("Bonus Depreciation" didn't make it into the 'HIRE Act of 2010' but did make it in the 'Small Business Jobs and Credit Act of 2010' extending "bonus depreciation" for the 2010 tax year - check back here often to stay posted on the latest legislative developments.)

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.

Who Qualifies for Section 179?
All businesses that purchase or finance less than $2,000,000 in business equipment during tax year 2010 should qualify for the Section 179 Deduction. In addition, most tangible goods (including "off-the-shelf" software) qualify for the Section 179 Deduction (see list of qualifying equipment). Also, to qualify for the Section 179 Deduction, the equipment purchased must be placed into service between January 1, 2010 and December 31, 2010.

The deduction begins to phase out if more than $2,000,000 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.