Understanding Section 179: A Key Tax Break for Manufacturers

Under Section 179 of the IRS tax code, manufacturers can maximize deductions and save money on equipment purchases. This provision allows businesses to deduct the full cost of qualifying equipment, property, and software purchases in the year they are made—rather than having to depreciate the value over several years. It can be beneficial for manufacturers to know about this provision; for specific information pertinent to their organization, business owners should always consult a tax professional.

What is Section 179?

Section 179 is a tax code provision that allows small businesses to deduct the full purchase price of qualifying business equipment, machinery, and software in the year it’s placed into service, rather than depreciating the cost over several years. Section 179 was enacted to encourage businesses to invest in equipment without worrying about long-term depreciation schedules.

How Does Section 179 Work?

Normally, when a business purchases equipment or property, the IRS requires businesses to spread the deduction over several years, based on the asset's useful life. However, Section 179 allows businesses to deduct the full purchase amount in the year they acquire the asset—up to certain limits.

Key Features of Section 179

1. Eligible Property: Section 179 applies to both new and used property, as long as it is purchased and used for business purposes.
2. Deduction Limit: For 2024, the maximum deduction limit for Section 179 is $1,160,000, with a phase-out threshold of $2.89 million. This means if a business buys more than $2.89 million worth of qualifying property in one year, the deduction begins to decrease, ultimately phasing out completely once you exceed $4.05 million in purchases.
3. Bonus Depreciation: In addition to Section 179, businesses may also take advantage of bonus depreciation, which allows the business to deduct an additional percentage (typically 100%) of the cost of qualifying property in the first year. The combination of both Section 179 and bonus depreciation gives businesses a powerful tax-saving tool.
4. Profit Requirement: One key aspect of Section 179 is that the deduction cannot exceed taxable income for the year. If the business does not have enough taxable income to use the full Section 179 deduction, the business can carry the unused portion over to future years.

Example of Section 179 in Action

With Section 179, if a business purchases a press brake for $40,000, the business can deduct the full $40,000 purchase price on their taxes in the same year it was bought—assuming the deduction limits and phase-out thresholds are not exceeded.

Without Section 179, businesses would typically need to depreciate the press brake over several years (usually five years). Under this provision, businesses save that money right away, which can be reinvested into the business.

Benefits of Section 179 for Small Businesses

• Immediate Tax Relief: The biggest advantage of Section 179 is the ability to take an immediate tax deduction, which can reduce the overall tax bill for the year.
• Can Improve the Bottom Line: By allowing businesses to immediately expense the cost of new equipment, Section 179 encourages growth and reinvestment. This means businesses could write off a significant amount of the total purchase price of a new or used machine, while investing in new equipment that could improve the bottom line.
• No Need for Financing: Since businesses can write off the full cost of the asset in the year it is purchased, businesses can avoid long-term debt accumulation.
• Flexibility: Section 179 applies to a wide range of purchases, from small office equipment to large machinery and vehicles, giving business owners flexibility in how they allocate their spending.

Section 179 is a powerful tool for business owners looking to reduce their tax liabilities while making necessary business investments. By understanding the rules and limits, businesses can leverage Section 179 to improve cash flow and grow their business. As always, it’s important to consult with a tax professional or accountant to ensure every business is making the most of this deduction and complying with all IRS requirements.