Using Your S Corp: Section 179 Deductions

If the title of this article is already making you yawn, I promise—this will be more exciting than you think. Why’s that? Because this article is all about SAVING YOU MONEY BY LOWERING YOUR TAXES.

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Now that I have your attention, let’s dive in. Using a Section 179 tax deduction with your S Corp allows you to deduct the full purchase amount of business equipment from your personal taxable income.

When a Section 179 deduction is personally allocated to you from an S Corp or partnership, the income and expense are “passed through” to you, and you claim it on your individual tax return. This means any income you earn from your S Corporation will be reduced by your Section 179 deductions, and you’ll only have to pay taxes on the reduced amount. 

Let’s look at an example to see how this would play out in real life:

Tom is a real estate investor who started an S Corp to hold his investments. He earned $100K in 2020 through the S Corp. Since an S Corp is a pass-through entity, Tom would typically have to pay personal income taxes on the $100K the S Corp made. However, if Tom has $20K of Section 179 deductible expenses, he’d only have to pay personal income taxes for $80K. 

Pretty spiffy, right?

How Section 179 Works

Section 179 gets its name because the rule is found in section 179 of the Internal Revenue Code. Essentially, this rule allows you to write off the full cost of eligible Section 179 property in the year it is purchased and put into use instead of deducting the depreciation over time.

This means you cannot take a 179 deduction on property purchased in a previous year, even if this is the first year you used the property for business purposes. For example, if you bought a vehicle for personal use in 2019, then converted it to a company car 2020, you cannot use a Section 179 deduction.

What You Can and Can’t Deduct

Property eligible for the Section 179 deduction is usually tangible personal property (usually equipment or office furniture) purchased for use in your business. 

Some common examples of Section 179 qualifying property include:

• Equipment (machines, etc.) 
• Tangible personal property
• Certain business vehicles (restriction apply here — we’ll discuss this later)
• Computers and software
• Office furniture and equipment

However, certain types of depreciable property are NOT eligible for a Section 179 expense deduction. Ineligible property includes:

• Real property (land and the building on the land)
• Property used outside the United States
• Air conditioning and heating units
• Furnishings and rental lodging
• Intellectual property

Additionally, if you use property for both personal and business purposes, you can only use a Section 179 deduction if the asset is used at least 51 percent of the time for business. 

Section 179 Deduction Limitations

The total amount of purchases you can write off changes every time Congress updates IRC section 179 of the tax code. As of 2020, the maximum Section 179 expense deduction is $1.04M. 

In addition, this limit will be reduced by the amount by which the cost of Section 179 eligible property placed in service during the tax year exceeds $2.59M. This means if your business purchases and puts into use $2.6M, you’ll only be able to deduct $1.03M of these expenses using Section 179. The $10K overage on the $2.59M limit will reduce the $1.04M limit by $10K.

As a small business, I know you probably won’t come anywhere close to this amount of Section 179 expenses. But it’s always a good idea to know the rules, just in case.

Business Vehicle Deductions

People used to refer to Section 179 as the “Hummer Deduction” or the “SUV Tax Loophole” because many businesses took advantage of these deductions to write off the full purchase price of expensive vehicles. In response, the IRS severely reduced allowable write-offs for business vehicles. As of 2020, the maximum section 179 expense deduction for sport utility vehicles is $25,900.

Bonus Depreciation

If you can't write off an asset immediately, you have to depreciate it. You deduct a percentage of the value each year until you've written off the entire cost. 

It's also possible that you can take off extra for expenses that exceed the Section 179 limit, the first year as "bonus depreciation." Through 2022, the amount of bonus depreciation you can claim is 100%. 

Starting in 2023, bonus depreciation rates decrease to:

• 80% in 2023
• 60% in 2024
• 40% in 2025
• 20% in 2026

When you use Section 179 deductions with your S Corp, you can save a ton of money in taxes. Make sure you keep track of everything you buy for your business and GET THOSE DEDUCTIONS!

Interested in learning more? Check out our articles Using Your S Corp: Payroll Taxes and Getting The Most Out of Employee Business Deductions.