What Are the Section 179 Deduction Limits?

The Section 179 deduction, found in the Internal Revenue Code, is a tax incentive designed to encourage businesses to invest in their own operations. It allows a business to deduct the full purchase price of qualifying equipment and software during the tax year it was placed in service. Instead of capitalizing an asset and depreciating it over several years, this provision permits an immediate expense. This accelerates the tax benefits of the purchase, effectively lowering the cost of the asset and encouraging businesses to acquire, upgrade, and expand.

Core Deduction and Spending Limits

The Section 179 deduction is governed by two financial thresholds that are adjusted for inflation. For tax year 2024, a business can expense a maximum of $1,220,000 in qualifying asset costs. For tax years beginning in 2025, this maximum deduction amount increases to $1,250,000. This limit applies to the combined cost of all assets you elect to expense.

A separate figure is the total investment spending cap, which triggers a phase-out of the deduction. For 2024, this cap is set at $3,050,000, and for 2025, this spending cap rises to $3,130,000. If a business places more than this amount of qualifying property into service during the year, the maximum available deduction begins to decrease.

The reduction in the deduction is calculated on a dollar-for-dollar basis. For every dollar a business spends on qualifying property over the spending cap, its maximum available Section 179 deduction is reduced by one dollar. For instance, if a business places $3,150,000 of equipment into service in 2024, it has exceeded the $3,050,000 spending cap by $100,000. Consequently, its maximum available deduction of $1,220,000 would be reduced by that same $100,000, resulting in a new deduction limit of $1,120,000. If spending reaches or exceeds $4,270,000 in 2024, the deduction is eliminated entirely.

Business Income Limitation

Beyond the spending and deduction caps, there is another constraint based on a business’s financial performance. The total Section 179 deduction a business can claim for a tax year cannot be greater than its net taxable income from the active conduct of its trade or business. This means that a business cannot use the deduction to create a net operating loss for tax purposes. The calculation of this business income is made after taking all other normal business deductions but before applying the Section 179 deduction itself.

This limitation ensures that the tax benefit is tied directly to profitability. For example, if a business has a net taxable income of $50,000 before considering Section 179, its deduction for that year would be capped at $50,000, even if it purchased $100,000 worth of qualifying equipment and was otherwise eligible for the full amount.

If a portion of the Section 179 deduction is disallowed because of the business income limitation, that unused amount is not permanently lost. Instead, the disallowed deduction can be carried forward to the following tax year. This carried-over amount can then be deducted in that future year, subject to the deduction limits and business income rules applicable to that year.

Qualifying Property Requirements

To be eligible for the Section 179 deduction, the asset must meet several specific criteria. The property must be:

• Tangible, meaning it can be physically touched.
• Purchased, as opposed to leased or inherited, for use in a trade or business.
• Used for business purposes more than 50% of the time.
• Placed in service—meaning it is installed and ready for its intended use—during the same tax year for which the deduction is being claimed.

Common examples of qualifying property include machinery, business equipment, office furniture, and computer hardware. An important inclusion is “off-the-shelf” computer software, which is eligible even though it is technically an intangible asset. Property that does not qualify for the deduction includes land, land improvements like paving or fences, and the structural components of buildings. However, certain improvements to the interior of nonresidential buildings, known as qualified improvement property, may be eligible.

Business Vehicles

Vehicles used for business have specific rules and limitations under Section 179. The amount of the deduction can vary significantly based on the vehicle’s size and type. For heavy vehicles with a gross vehicle weight rating (GVWR) over 6,000 pounds, a business may be able to deduct a larger portion of the purchase price.

In contrast, passenger automobiles, trucks, and vans that are used more than 50% for business but do not meet the weight requirements are subject to much lower annual deduction limits. For 2024, the Section 179 deduction for SUVs and crossovers with a GVWR above 6,000 pounds is capped at $30,500. For 2025, this limit for certain SUVs increases to $31,300.

How to Claim the Deduction

Claiming the Section 179 deduction is an election made on a business’s annual tax return by filing IRS Form 4562, Depreciation and Amortization. This form is not filed on its own but is submitted with the business’s main tax return, such as a Schedule C for sole proprietors, Form 1120 for corporations, or Form 1065 for partnerships.

The election is made in Part I of Form 4562. On this part of the form, you must provide a description of the property, its total cost, and the specific dollar amount you are electing to deduct. This form must be completed and attached to the income tax return for the year the property was placed in service.