Does Used Equipment Qualify for Section 179?

The Section 179 deduction permits businesses to expense the full purchase price of certain equipment in the year it is placed into service, offering an immediate tax benefit instead of depreciating the cost over several years. This tax incentive is designed to encourage businesses to invest in themselves. Used equipment can qualify for the Section 179 deduction, provided it meets specific criteria set by the IRS.

Qualifying Used Equipment Rules

For used equipment to be eligible for the Section 179 deduction, it must be “new to you,” meaning the business cannot have previously owned or used the asset. The equipment must be acquired through a purchase, with cash or a loan, as property that is inherited or received as a gift does not qualify. This rule is designed to stimulate new investment for the business.

The equipment cannot be acquired from a “related party.” This term includes immediate family members like spouses, ancestors, and lineal descendants. It also extends to certain business entities, such as corporations or partnerships where the taxpayer has a controlling interest. This restriction prevents generating tax deductions by transferring assets between affiliated entities.

A wide array of tangible personal property used for business purposes is eligible for the deduction. This includes:

• Machinery, tools, and equipment
• Office furniture and computers
• “Off-the-shelf” software

Certain business vehicles are also eligible, though specific limitations apply, particularly for those with a gross vehicle weight rating (GVWR) over 6,000 pounds.

Conversely, some property types are excluded. Real property, which includes land and buildings, is not eligible, though you may deduct certain improvements to non-residential buildings like security systems or roofing. Equipment acquired for personal use does not qualify. If an asset is used for both business and personal purposes, the deduction is limited to the percentage of time it is used for business, which must be more than 50%.

Deduction Limits and Calculations

The Section 179 deduction is subject to several financial limitations. For the 2024 tax year, the maximum amount a business can deduct is $1,220,000, which is indexed for inflation and set to increase to $1,250,000 for 2025. This cap is the total amount of qualifying equipment costs that can be expensed in a single year.

A second limitation is the total equipment purchase threshold, also called the spending cap. For 2024, this threshold is $3,050,000, increasing to $3,130,000 in 2025. If a business’s total qualifying equipment purchases for the year exceed this amount, the maximum deduction is reduced dollar-for-dollar. For example, if a business spends $3,150,000 on equipment in 2024, its maximum deduction is reduced by $100,000 to $1,120,000.

The final constraint is the business taxable income limitation. The total Section 179 deduction claimed cannot be more than the business’s net taxable income for the year. If the deduction amount is greater than the net income, the excess cannot be taken in the current year. This excess amount can be carried forward to a future tax year and deducted subject to that year’s limitations.

Information Required to Claim the Deduction

To claim the Section 179 deduction, a business must gather specific information for each piece of qualifying used equipment. For every asset, you will need a clear description of the property, its total cost, and the date it was placed in service. The “placed in service” date is when the asset is ready and available for its intended function, not necessarily the purchase date.

This information is reported to the IRS on Form 4562, Depreciation and Amortization. Part I of Form 4562 is for the Section 179 deduction, where you will enter the description and cost for each property. The form guides you through calculating the total elected cost to be deducted and applying the annual limit and spending cap phase-out.

The Claiming Process

The final step is to file the election by attaching the completed Form 4562 to your business’s annual federal income tax return for the year the equipment was placed in service. The primary return it is attached to depends on your business structure. For example, a sole proprietor attaches it to Schedule C (Form 1040), while a corporation attaches it to Form 1120.

The election must be made on a timely filed tax return for the year the property was placed in service, including extensions. If the business disposes of the equipment or if its business use drops to 50% or less before the end of the asset’s recovery period, a portion of the deduction may be subject to recapture.

Deduction recapture means you must report a part of the initial deduction as ordinary income in the year the business use changes or the asset is sold. The amount to be recaptured is the difference between the Section 179 deduction claimed and the depreciation you would have been allowed under standard methods. This rule prevents taking a large upfront deduction on an asset not used for business long-term.