By Cathy Peters
Section 179 of the IRS Code allows a depreciation deduction for qualified capital expenditures in one year, rather than depreciating the assets over a longer period of time. Electing to take a deduction on an asset in the first year is called a “Section 179 deduction.” This is obviously an advantage to a business because it reduces taxable income by the full amount of the capital purchase to the extent there is business profit.
Section 179 was designed with small businesses in mind. That’s why most types of “business equipment” qualifies for this deduction (click here for a list). To qualify for this deduction in 2013, the asset must be purchased and placed in service between January 1, 2013 and December 31, 2013 and be used for business purposes more than 50% of the time.
Bonus depreciation of 50% of the cost of qualifying property is also available in 2013. While the 179 deduction is available for most new and used asset purchases, the bonus depreciation can only be taken on new equipment. Software is not eligible for bonus depreciation.
The Section 179 deduction does have limits. There are caps on the total amount written off annually ($500,000 in 2013) and limits to the total amount of assets purchased ($2,000,000 in 2013). The deduction begins to phase out dollar-for-dollar for purchases over the $2,000,000 threshold. There are no limits on the amount of 50% bonus depreciation that can be taken.
When applying these provisions, Section 179 is usually taken first, followed by bonus depreciation. Many states do not allow bonus depreciation which makes the Section 179 expense a better choice if there is a profit to absorb the deduction and the asset purchases do not exceed the $2 million threshold.
Section 179 limits and bonus depreciation can change each year. However, these generous deduction limits are available for 2013 and offer small businesses a great opportunity to maximize purchasing power.
Below is an example calculation of 2013 Section 179 and Bonus Depreciation.