Section 179 Property Tips: How to Scoop Up Big Write-Offs

I work with savvy real estate investors day in, day out to give them strategies to protect their hard-earned moolah from Uncle Sam’s clutches.

One tactic many of them overlook is the Section 179 property deduction. With this write-off, you can deduct the total value of certain types of property instead of having to depreciate it over time.

Here's a rundown of how it works.

What Is Section 179?

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179) allows investors to deduct the cost of certain types of property in the year it is purchased and put into use.

Under the typical deduction process for property purchased as a business expense, tax law would require the cost of the property to be capitalized and depreciated over time. But with Section 179, you can write off the total cost of eligible property instead of having to wait for the property to depreciate.

While Section 179 write-offs can be used for various types of business structures, it is particularly advantageous when you combine it with the tax savings offered by an S Corp. With an S Corp Section 179, you get the benefits of pass-through taxation combined with tax deductions for your business expenses.

What Property Qualifies For A Section 179 Deduction?

Unfortunately, you can’t deduct all the property you obtain for your business using Section 179: only certain assets can be written off. To qualify for a Section 179, the business property must meet the following criteria:

It Must Be Tangible

To be eligible for a Section 179 deduction, an asset must be tangible personal property. In most cases, it will be equipment or office furniture, but other types of property can be deducted.

It Must Have Been Purchased, Not Leased

A Section 179 write-off can only be used only property that you purchase using business funds during the tax year, including loaned funds. You cannot deduct leased property, inherited property, or gifted property using Section 179. Financed property may be deducted, however, as you'll see in a bit.

The Property Must Be (Mostly) Used Specifically For Your Business

You can only deduct property under Section 179 if you use it for business purposes more than 50% of the time. If less than 50% of the use is for business purposes, you cannot use Section 179, which means you’ll have to depreciate the asset instead.

If less than half of the use of the property is for personal purposes, you can still deduct the purchase using Section 179. However, you’ll need to reduce the amount of your deduction by the percent of the time you use it for personal purposes and keep records of your business use of the property.

The Property Must Be Used During The Current Tax Year

You can only use a Section 179 deduction for property that was purchased, acquired, or converted to business use in the current tax year.

The Property Must Be Acquired From A Non-Related Party

You cannot use a Section 179 deduction for property purchased from a relative or another corporation or organization that you control.

What Property Does Not Qualify As A Section 179 Write Off?

The following types of property cannot be deducted under Section 179:

• Real property, including:
  • Land
  • Buildings
  • Sidewalks
  • Landscaping
  • Parking lots
  • Income-producing real property
  • Investment property
• Assets that were used for personal purposes 50% or more of the time
• Assets that were obtained through a tax-free exchange or from a related person or business.
• Intangible assets such as intellectual property (copyrights, patents, trademarks, etc.)

Limitations on Section 179 Deductions

There are also several limitations in place that restrict the amount of Section 179 deductions you can take in a single year:

• Section 179 deductions cannot exceed your net business income for the current tax year. If your qualified Section 179 deduction amounts exceed your net business income, they can be carried over and used in the next year.
• Starting in 2017, the Tax Cuts and Jobs Act (TCJA) doubled the maximum Section 179 deduction from $500,000 to $1,000,000 and indexed this amount for inflation.
• As of 2021, the maximum Section 179 deduction is $1,050,000. This limit is reduced by the amount of money by which the price of Section 179 property placed in service during the tax year exceeds $2,620,000.
• As of 2021, the maximum Section 179 deduction for sport utility vehicles is $26,200.

Section 179 And Equipment Financing

Did you know that Section 179 also works with equipment financing? Many people don’t realize they can also use Section 179 to deduct the entire cost of financed equipment, thinking they can only write off the amount they actually paid. Fortunately, this isn’t the case! If you finance an equipment purchase with a loan, you can still deduct the total purchase price. And as an added bonus, you can also include the borrowing costs in your Section 179 write-off.