Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means if you finance a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. This deduction is good on new and used equipment, as well as off-the-shelf software. To take the deduction for tax year 2021, the equipment must be financed or purchased and put into service between January 1, 2021 and the end of the day on December 31, 2021. This deduction is not automatic and must be elected. In order to elect to take the deduction, you’ll need to fill out Part 1 of IRS form 4562.
All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2021 should qualify for the Section 179 Deduction (assuming they spend less than $3,500,000). Congress has stopped the Section 179 roller coaster of the past few years, and has made the Tax Deduction limit permanent. The limit is $1,000,000 for 2021 and beyond. This is wonderful news for small and medium businesses, as they know early in the year that the deduction will be there for them.
The equipment, vehicle(s), software or HVAC hardware 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 monetary amount eligible for Section 179.
Under Section 179, you can deduct the cost of tangible personal property (new or used) that you finance for your business if the IRS has determined that the property will last more than one year. Examples of tangible personal property include computers, business equipment and machinery/heavy equipment, and office furniture.
There are caps to the total amount written off ($1,000,000 for 2021), and limits to the total amount of the equipment purchased ($2,500,000 in 2021). The deduction begins to phase out on a dollar-for-dollar basis after $2,500,000 is spent by a given business (thus, the entire deduction goes away once $3,500,000 in purchases is reached).