How the IRC Sec 179 Deduction Works for a Business

Internal Revenue Code Section 179 provides a tax deduction that allows businesses to expense the full purchase price of certain qualifying assets in the year they are put into use. This is an alternative to capitalizing an asset and depreciating its cost over several years. The purpose of this tax provision is to encourage small and medium-sized businesses to purchase equipment and invest in their growth. By accelerating the tax deduction, it can improve a company’s cash flow in the year of acquisition.

This tax incentive is structured as an election, meaning businesses are not required to take it but must choose to do so. The election is made on a property-by-property basis, offering flexibility in tax planning. Understanding how this deduction operates directly impacts a company’s tax liability and its ability to fund capital expenditures.

Determining Qualified Property

To use the Section 179 deduction, a business must first ensure the asset is considered qualified property. The most common category is tangible personal property, which includes items like machinery, equipment, office furniture, and vehicles. A requirement is that the property must be used for business purposes more than 50% of the time.

Both new and used equipment are eligible for the deduction, a feature that expands its utility. This means a company can acquire pre-owned machinery or vehicles and still benefit from the immediate expensing provision, as long as the property is “new to them.”

Beyond tangible goods, other asset types also qualify. “Off-the-shelf” computer software that is readily available for purchase and not substantially modified is eligible. Another category is Qualified Improvement Property (QIP), which refers to specific improvements made to the interior of a nonresidential building after the building has been placed in service. This can include:

• Upgrades to drywall
• Ceilings
• Interior doors
• Fire protection systems

Conversely, several types of property are excluded from Section 179 eligibility. Land and land improvements, such as swimming pools and paved parking areas, do not qualify. Buildings and their structural components are also ineligible, with the specific exception of QIP. Property acquired from a related party or inherited property also fails to meet the qualification standards.

Understanding Deduction Limitations

The ability to expense property under Section 179 is subject to dollar limitations that are adjusted annually for inflation. For tax year 2025, the maximum amount a business can elect to deduct is $1,250,000. This is the total Section 179 expense a business can claim across all qualifying assets. For the 2024 tax year, this limit was $1,220,000.

A second limit is the investment or equipment purchase threshold, designed to benefit small and medium-sized businesses. For 2025, if a business places more than $3,130,000 of qualifying property into service, the deduction begins to phase out. The deduction is reduced on a dollar-for-dollar basis for investment over this threshold. For example, if a business purchases $3,180,000 in equipment, its maximum deduction is reduced by $50,000. If total purchases reach or exceed $4,380,000 in 2025, the deduction is eliminated.

The final constraint is the business taxable income limitation. The Section 179 deduction claimed cannot be more than the business’s aggregate net taxable income from its active trades or businesses. This means the deduction cannot be used to create or increase a net operating loss. For instance, if a business has a taxable income of $50,000, it can only claim up to $50,000 of the deduction.

Any amount of the Section 179 deduction disallowed due to the taxable income limitation is not permanently lost. The business can carry forward the unused deduction to the following tax year. This carryforward amount will then be subject to the deduction limitations of that future year.

Information Required to Make the Election

To claim the Section 179 deduction, a business must make an election on IRS Form 4562, “Depreciation and Amortization.” This form is filed with the business’s annual income tax return for the year the property was placed in service.

The election is made in Part I of Form 4562. Completing this section requires specific details about each piece of property being expensed. The form is structured with columns that guide the taxpayer through the necessary information.

In Column (a), the taxpayer must provide a clear “Description of property.” This should be specific enough to identify the asset. For example, “2025 Ford F-250 Heavy Duty Truck” is more appropriate than “vehicle,” and “Office Computer System” is more descriptive than “computer.”

Column (b) requires the “Cost” of the property, which is the full purchase price before any trade-in allowances. Column (c) is for the “Elected cost,” which is the portion of the asset’s cost the business chooses to expense under Section 179. A business can elect to expense the full cost up to the allowed limits or expense only a portion and depreciate the remainder.

Recapture of the Deduction

The tax benefit from a Section 179 deduction is not always permanent and can be subject to “recapture.” Recapture means that a portion of the deduction previously claimed must be added back to the business’s taxable income. This occurs if the business use of the property changes or if the asset is disposed of before the end of its recovery period.

The most common trigger for recapture is when the business use of an asset drops to 50% or less during its recovery period. The Section 179 deduction requires that property be used predominantly for business. If business use falls below this threshold, the recapture rule is engaged. For example, if a vehicle’s business use drops from 90% to 40% two years after purchase, recapture is required.

Selling or otherwise disposing of the asset before its recovery period is over also triggers recapture. The amount that must be recaptured is the difference between the Section 179 deduction taken and the amount of depreciation that would have been allowed up to that point. This amount is reported as ordinary income. The recaptured amount is reported on Part IV of Form 4562.