The Truth Behind Section 179

Yes, you are about to read a blog discussing an internal revenue code section; try to contain your excitement.  Chances are you have heard of code section 179 from a sales person telling you what a great deal it is to be able to take advantage of 179.  They will show you that the $50,000 piece of equipment you are about to buy will really only cost you $30,000.

The truth is that there is nothing magical about 179; it is simply the ability to deduct the entire equipment expense for asset purchases in one year.  Normally when you buy equipment or furniture you have to deduct or expense it over a number of years; we will use 5 years for our example.  $50,000 equipment would be deducted by $10,000 per year for 5 years.  At the end of the 5 years the entire cost of the equipment would be fully deducted.

Code section 179 just says that instead of spreading that deduction over a 5 year period, a taxpayer can take the full deduction in the year the equipment is placed in service.

If you are paying cash for the equipment, then this is a great thing because you will be matching your cash outflow with a deduction; $50,000 cash outflow and a $50,000 deduction.  If you are financing the equipment purchase, then you may not want to take the 179 deduction in the first year.  The reason is that you will be paying for the equipment over a period of time.  In this case you may want to take regular depreciation so that you can better match the cash outflow with the deduction.

If you are having a fantastic year and do not expect income to be as high in future years, then you may also want to use section 179 to try and lower your current tax bill.

Section 179 limits can change every year, make sure to check in with your accounting manager before you purchase any major equipment.

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