Can You Take Section 179 on Software?
Understand the tax implications of your business software. Section 179 allows for an immediate deduction, but specific IRS rules on eligibility apply.
Businesses looking to lower their current-year tax liability can use Section 179 of the U.S. Internal Revenue Code. This provision allows for the immediate expensing of certain asset purchases rather than depreciating them over several years. A common question is whether this tax treatment applies to business software. The answer is yes; software can be a qualifying purchase for the Section 179 deduction, but it must meet specific criteria defined by the IRS.
Qualifying Software Requirements
For software to be eligible for the Section 179 deduction, it must be considered “off-the-shelf.” This means the software is readily available for purchase by the general public and is not custom-designed for a specific business. The software must be subject to a non-exclusive license, meaning the vendor sells the same program to many different customers. Examples of qualifying software include accounting and financial management systems, Customer Relationship Management (CRM) software, and office productivity suites.
Conversely, software that is specially developed or significantly modified for your company does not qualify for this deduction. If a business hires a developer to create a proprietary program from scratch, that software is considered custom-made and falls outside the scope of Section 179.
The software must be used for income-producing business activities more than 50% of the time. If the software is used for both business and personal reasons, the deduction can only be claimed on the portion of the cost equivalent to its business use percentage. Furthermore, the software must be “placed in service”—meaning it is installed and actively being used—in the same tax year for which the deduction is being claimed.
Finally, the software must have a determinable useful life of more than one year. This requirement is met by most business software purchases.
Deduction Limits and Calculations
The Section 179 deduction is subject to annual dollar limits that apply to the total of all qualifying property, not just software. For the 2025 tax year, the maximum amount a business can deduct is $1,250,000. This cap is the total Section 179 expense a business can claim for all eligible assets placed in service during the year, including machinery, equipment, and software.
The deduction also has a phase-out threshold based on the total cost of equipment purchased, which for 2025 is $3,130,000. If a business’s total qualifying purchases exceed this amount, the Section 179 deduction is reduced on a dollar-for-dollar basis. For instance, if a company spends $3,180,000 on qualifying property, its maximum deduction is reduced by $50,000 to $1,200,000.
A final constraint is the business taxable income limitation, as the deduction cannot exceed the business’s net taxable income for the year. A business cannot use this deduction to create a net operating loss. For example, if a business has a taxable income of $75,000 and purchases $100,000 in qualifying assets, its Section 179 deduction is limited to $75,000. Any amount that cannot be deducted can be carried forward to a future tax year.
How to Claim the Deduction
To claim the Section 179 deduction for qualifying software, a business must make a formal election, as this is not an automatic deduction. This requires filing IRS Form 4562, “Depreciation and Amortization,” with your annual tax return for the year the software was placed in service.
The election is made in Part I of Form 4562, where you must provide details for each asset. This includes a description of the property (e.g., “Accounting Software”), its total cost, and the “elected cost,” which is the amount you are choosing to deduct. You must accurately list each piece of qualifying software and other equipment separately.
After listing the assets, you will calculate the total elected cost, which is subject to the annual deduction and business income limits. Line 12 of Form 4562 shows the final deduction amount that you carry to your main business tax form, such as Schedule C for sole proprietors or Form 1120 for corporations.
Proper record-keeping is necessary to substantiate your claim. You must maintain documentation that proves the purchase, cost, and date the software was placed in service, which includes invoices, receipts, and proof of payment.