Does a Septic System Qualify for Section 179 Deductions?

Small business owners and property investors seek ways to reduce taxable income through deductions. Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and property improvements in the year they are placed into service rather than depreciating them over time. However, not all assets qualify, making it important to understand eligibility.

Section 179 Eligibility Factors

To qualify for Section 179, an asset must be tangible property used for business purposes more than 50% of the time. This includes machinery, vehicles, furniture, and certain building improvements. The IRS categorizes eligible property as personal property or specific real property improvements. Personal property includes equipment and tools not permanently attached to a building, while real property improvements cover upgrades to nonresidential buildings, such as HVAC systems, fire alarms, and security systems.

Real property—land and buildings—does not qualify, but certain improvements to nonresidential buildings do. The maximum deduction for 2024 is $1.22 million, with a phase-out threshold beginning at $3.05 million in total equipment purchases. Businesses exceeding this threshold must consider alternative depreciation methods.

Septic System Classification

A septic system is considered a land improvement rather than personal property, affecting its eligibility for Section 179. Unlike machinery or equipment that can be relocated, a septic system is permanently installed as part of a property’s infrastructure. The IRS generally excludes land improvements—such as grading, landscaping, and drainage systems—from Section 179 deductions.

If a septic system is part of a broader renovation that includes qualifying building improvements, some components may be depreciable under different tax provisions. The IRS permits certain nonresidential building improvements—such as plumbing and HVAC systems—to qualify for accelerated depreciation under the 15-year Modified Accelerated Cost Recovery System (MACRS) instead of the standard 39-year schedule for commercial real estate.

Considerations for Rental Properties

Owners of rental properties must determine how tax rules apply to improvements like septic systems. Rental income is typically classified as passive under IRS guidelines, limiting eligibility for Section 179 deductions. Since rental activities do not usually qualify as an active trade or business unless the owner materially participates in management, most improvements must be capitalized and depreciated over time.

For residential rentals, improvements are depreciated over 27.5 years, while commercial properties follow a 39-year schedule. A cost segregation study can help accelerate depreciation by identifying components with shorter recovery periods. While septic systems are generally classified as land improvements with a 15-year depreciation period under MACRS, certain elements—such as pumps or electrical components—may qualify for shorter schedules if they serve specific business functions.

Alternative Depreciation Approaches

If a septic system does not qualify for Section 179, businesses and property owners must use alternative depreciation methods. Under MACRS, septic systems typically fall under the 15-year property category, meaning the cost is deducted incrementally over that period using either the 150% declining balance or straight-line method.

Bonus depreciation, under IRC Section 168(k), allows businesses to deduct 60% of eligible asset costs in the first year, with the remaining balance depreciated under MACRS. Unlike Section 179, bonus depreciation is not subject to annual deduction limits, making it useful for businesses with significant capital expenditures. However, taxpayers should confirm whether their septic system installation meets the applicable criteria.