Understanding the IRS Section 179 Election

[Melanie Baldridge]

Understanding the IRS Section 179 Election to Expense Depreciable Assets is crucial to making the most of your tax strategy.

This provision allows taxpayers to expense certain qualifying assets upfront instead of depreciating them over a period of years.

However, there are several factors to consider when using this tax tool.

Let’s break down how it works:

What Is Section 179?

Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment and software up to an annual limit.

In 2024, for example, taxpayers can expense up to $1,220,000 of qualified assets.

This election can apply to many types of tangible personal property, such as machinery, equipment, and off-the-shelf software, which are used predominantly in your business.

Limits on Section 179 Expensing

As attractive as Section 179 may seem, there are limits.

For tax year 2024, the maximum investment limit is set at $3,050,000.

If your business places more than this amount in service, the amount you can expense is reduced dollar-for-dollar over this threshold.

In addition to the dollar and investment limits, the amount of your Section 179 deduction cannot exceed your taxable business income for the year.

This means that even if your business invests heavily in qualified property, the deduction could be limited by the business’s profitability.

Also, not all property qualifies for Section 179.

Real property, like buildings and structural components, generally does not qualify unless it is "qualified improvement property."

Examples of qualified improvement property include improvements made to the interior of nonresidential real property, such as HVAC systems or alarm and security systems.

We refrain from making direct recommendations on Section 179 because we believe this decision is best made by the CPA, who completely understands the client’s overall tax situation.

The decision to elect Section 179 is deeply tied to broader tax implications, including other deductions, income limitations, and future business planning.

Your CPA has a holistic view of your finances and can help you make the right choice.

TLDR:

* Section 179 is a powerful tool for business owners and real estate investors, allowing immediate expensing of qualifying assets in the year they are placed in service.

* Annual limits apply to how much can be expensed, with the 2024 cap set at $1,220,000, and investment limits that start to phase out when more than $3,050,000 of property is placed in service.

* Not all property qualifies for Section 179. Typically, tangible personal property qualifies, but real property does not unless it meets the definition of qualified improvement property.

* The importance of consulting a CPA—The Section 179 election can be a valuable tax strategy, but it’s also complex and should be made in the context of your entire tax picture. Your CPA is the best resource for guiding you through this decision.