Internal Revenue Code Section 179 allows business owners to use a tax deduction for certain depreciable purchases that they would otherwise capitalize on. This IRC provision enables the business owner to take the entire deduction in the year they purchased the items instead of depreciating the cost over the longer term. The provision applies to specific assets such as equipment, vehicles, and software and is intended to provide an incentive for small businesses to expand their operations by purchasing new equipment.
Tax deductions are a faster means of recouping the cost of business investments, and business owners may therefore prefer a deduction against taxable income to the longer process of depreciation.
No, you cannot take the Section 179 deduction on rental property unless the property is qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property. A qualified improvement property is an improvement the investor makes on the interior portion of a nonresidential building and may include drywall, interior doors, lighting, flooring, fire protection systems, and plumbing.
The 2017 Tax Cuts and Jobs Act made several changes to Section 179. It increased the amount business owners can deduct for qualified investments in the year they purchase the qualified asset. The maximum deduction for 2023 purchases (taxes filed in 2024) is $1,160,000. However, if you place in service equipment or other eligible items worth more than $2,890,000, your maximum Section 179 deduction begins to decline.
The TCJA also changed the bonus depreciation limits, allowing businesses to deduct the total cost of other eligible expenses rather than recouping the cost through depreciation. Those increased "bonus depreciation" limits will phase out beginning in 2023.
The TCJA changes also added limits for deductions of specific vehicles. Passenger vehicles and SUVs have deduction eligibility limits determined by weight, passenger capacity, and other specifications.
Another change that the TCJA made to Section 179 deductions is that it eliminated the exclusion of personal property items purchased for use inside rental units, including furnishings like kitchen appliances and window and floor treatments. A rental property owner can also use Section 179 to deduct other equipment that they use in their business, including computers, phones, office furniture and equipment, software, and other miscellaneous business equipment.
However, to use Section 179 for these deductions, your rental activity must qualify as a business, not an investment. If you operate to earn a profit and work at your business regularly and continuously, owning rental property should be eligible as a business, allowing these Section 179 deductions to be eligible.
As is the case with many sections of the IRC, Section 179 and bonus depreciation are complex topics. Reviewing your eligibility for deductions with a qualified tax advisor is always a great strategy.