How to Reduce Taxable Income with a Section 179 Deduction

Section 179 deductions are advantageous to take as a small business owner because they offer helpful tax deductions to reduce your business’s overall taxable income. Read on to learn what Section 179 of the IRS tax code is, Section 179 tax benefits, why the deductions matter, and how to handle your Section 179 expensing in this post!

What is Section 179?

First, let’s answer, “What is Section 179?” Section 179 of the Internal Revenue Code (IRC) allows eligible businesses to immediately deduct the cost of qualifying purchases such as machinery and equipment. All businesses need equipment: technology, office furniture, supplies, vehicles, machinery, or other tangible items.

Your business could purchase any number of these items throughout the year and may do so repeatedly. IRS Section 179 allows you to elect to deduct the cost of these items, lowering your business’ federal taxable income.

Section 179 changes

After 2017’s tax reform, there were two important Section 179 changes.

• Expense deduction and phaseout limits increased
• Eligible property for the expense changed

Read on to find out how Section 179 deductions work today.

Who qualifies for taking Section 179 deductions?

All business types (structures) are generally eligible for IRC Section 179 expensing, including:

• Corporations
• LLCs
• Partnerships
• Sole proprietorships

What property qualifies for a Section 179 deduction?

Tangible personal property purchased for business purposes generally qualifies for the Section 179 deduction. Certain improvements to nonresidential real property, such as roofs and systems for heating, air conditioning, security, and fire protection, also qualify as eligible under Section 179 guidelines.

Most types of business equipment your business purchases and places in service during the tax year could qualify for the Section 179 deduction.

 Items include:

• Equipment and machinery
• Business vehicles (but the deduction may be limited – see below)
• Computers
• Off-the-shelf computer software
• Office furniture and equipment
• Costs of certain improvements to business buildings
• Certain agricultural and storage structures

Section 179 business income limitations

The total amount you can deduct under Section 179 is subject to a dollar limit and a business income limit, each of which applies to the individual owner, not the business entity. Section 179 business income limitations are as follows:

• The maximum deduction for Section 179 for 2024 (taxes filed in 2025) is $1,220,000 of expenditures. The beginning phaseout starts at $3,050,000. These amounts adjust for inflation each year.
• More types of building improvements are allowed.
• The tax deduction is allowed for certain tangible personal property used to furnish lodging, such as furniture and appliances purchased for a furnished rental apartment.

How to calculate Section 179 limits

The deduction reduces dollar-for-dollar for qualified expenditures beyond the beginning phaseout. For example, let’s calculate the Section 179 tax deduction for a business making qualifying purchases of $3.27 million. First, subtract the phaseout amount from the qualifying purchase amount. That is $3.27 million – $3.05 million, or $220,000. Then, subtract that value from the maximum deduction. That is $1.22 million – $220,000. Therefore, the Section 179 deduction would be $1 million in this case.

The simplified formula is:

• (Section 179 maximum deduction – (Qualifying purchases – Phaseout amount)) = Section 179 deduction
• ($1.22M – ($3.27M – $3.05M)) = $1 Million

Here are a few additional rules:

1. The amount of taxable income from an active trade or business limits the deduction. Any unused deduction may be carried over for an unlimited number of years.
2. The deduction is pro-rated if business use is less than 100%.
3. The deduction is not allowed if business use is 50% or less.
4. Vehicle expense deductions, including the Section 179 deduction, have separate limitations for the maximum amount of depreciation you can take. The overall limitation is based on these factors:

• If the vehicle is a car, truck, or van
• If you have chosen to take special or bonus depreciation
• The gross vehicle weight (read more about using Section 179 for work vehicles)
• If the vehicle is bought or held for leasing by a business engaged in leasing passenger automobiles

After the first year, the balance of the qualifying vehicle’s cost depreciates at a different rate.

“John, my Block Advisors Tax Pro, exceeded my expectations. He asked questions about my business based on current tax provisions to position me favorably for all eligible deductions. He provided advice on ways to reduce tax burden with wise business purchases and activities that yield deductions.”

– Cheryl M. Francis, Blueprint for transformation

How to claim a Section 179 expense

Here’s the process for taking the deduction:

1. Purchase qualified property and start using it during the tax year.
2. Substantiate the financial records of each purchase, including the following:

• Date of purchase
• The date you began using the property
• Associated costs of the purchase. Your tax pro can help identify all qualifying property.

Use IRS Form 4562, Depreciation and Amortization, to calculate and claim a Section 179 deduction. Need help? Consult a Block Advisors certified small business tax pro to help you complete your small business tax return and determine if you qualify for a Section 179 deduction.

Get help with small business taxes

For a customized tax strategy, including how to maximize self-employed or small business tax deductions, turn to your Block Advisors certified small business tax pro. Get peace of mind with our 100% accuracy guarantee. 

As your partner in small business, Block Advisors also offers bookkeeping, payroll, and business formation services. We’re here to help year-round so you can focus on your small business dream.

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This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.