Section 179 Deduction 2023

As we inch ever closer to the end of the year, savvy fleet owners know to maximize their use of Section 179 for the year to get the best possible return on investment for their assets. Though we are not tax lawyers, this article should serve as a good foothold for fleets to begin the journey.

What is Section 179?

Section 179 allows a business to write off the entire depreciation of a purchased asset in the year it was purchased, effectively reducing the purchase price by way of lowering tax liability.

For instance, say that an owner-operator purchases a truck for $50,000 and has a marginal tax rate of 35%. By using Section 179, he frontloads the depreciation of the truck and lowers his tax liability by 17,500, effectively paying $32,500 for the truck instead.

The amount a business may claim under Section 179 deduction has an annual limit. For 2023, the deduction limit is $1,160,000 (an increase of $80,000 from last year) and the spending cap for which Section 179 can be applied is $2,890,000 ($190,000 higher than last year). The two numbers increase with inflation, so generally speaking it is a safe bet to assume it will increase every year, even if only marginally.

Business equipment that qualifies is almost any asset with a useful life beyond one year. This includes computers, office buildings, and trucks. If your trucking headquarters has purchased a new coffee maker, that could also be applied, though the tax savings would be much less than the purchase of a truck.

Exceptions to the Section 179 Deduction

Because the tax code can never be completely simple, exceptions apply.

Assets must have a useful life of over one year. Snacks, office supplies such as pencils, and month-to-month subscriptions are not eligible for this Deduction.

If an asset is used for anything other than business, only the percentage of business use can be written off. Furthermore, if the business use is less than half, then nothing can be written off. If purchasing a smartphone for business, make sure to use it more often for work than for calling your mother, or else you run the risk of losing all your deductions!

Additionally, the amount deducted from your tax bill as a result of your deduction cannot exceed the business’ income for that year. Hypothetically, if your business purchases $2,000,000 in trucks, has a 25% average tax rate, and generates $400,000 in income for the year, the maximum your business can claim in deductions is $400,000. Fortunately, the additional $100,000 in deductions can be carried over to the next year.

Software must have non-exclusive use. Purchasing tax preparation software from a retailer is eligible for the deduction, but a purchased website does not, as only your business can use it.

Vehicles have a complicated set of exceptions, however, vehicles originally intended for businesses, such as Semi-Trucks, dump trucks, and forklifts are fully eligible for the deduction.

The Section 179 Deduction is “use it or lose it” for the year of purchase. If your business purchases $350,000 worth of equipment in 2023, it cannot write-off $250,000 for its 2023 tax year and then $100,000 in the next year, unless it follows the “exceed income” example stated above, in which the company’s taxable income would have had to not exceed $350,000 to carry over any additional money. 

Since larger corporations are more likely to purchase business equipment exceeding $2,700,000 in a year, the current Section 179 Deduction leans in favor of smaller businesses and the middle class. Additionally, if your business does not start using the equipment the same year it is purchased or leased, the Deduction is lost.

Form 4562

The IRS form for Section 179, Form 4562, for the 2023 tax year has not been released yet, as of the time of writing, so be sure to check the IRS website as time goes on for the updated version of 2022. The IRS also has instructions to help make filling the form easier. It also has Publication 946 so you can read about Section 179 straight from the horse’s mouth.

Keep in mind that Form 4562 covers most, if not all, forms of depreciation. Section 179 relates to Part 1. Other Parts cover things such as MACRS depreciation (depreciation over time) and amortization (depreciation of an intangible asset, such as a patent becoming close to expiring). Assuming you own a trucking business, you will absolutely need to fill out Part 5 before starting Part 1, as Part 5 pertains to most vehicular use. The IRS places the most important sections before the less important sections, even if the less important sections can determine whether or not you need to fill out the more important sections, so prepare to jump around the pages quite a bit when filling out Form 4562. In fact, if you are a fleet owner who provides vehicles to your employees, you very well might want to start at Part 6 and work your way backward!

Make sure to keep a copy of your Form 4562 for next year; this year’s line 13 is next year’s line 10 (both lines pertain to carryover of disallowed deduction and lead to lower tax liability).

Section 179 vs. Bonus Depreciation

Both of these two tax tools are very similar, but are distinct. Section 179 loads 100% of the depreciation in the year of use and purchase, whereas bonus depreciation loads only a larger portion (currently, up to an amount equal to the tax % rate) into the first year and continues depreciating afterward.

For example, say a company just purchased an asset worth $100,000 and its marginal tax rate was 18%. If the company uses Section 179, it will write off $100,000 as an expense. By using Bonus Depreciation, a company would instead write off $18,000 for year 1 and continue depreciating the asset further in later years. One saves you from tax liability now, the other saves you from quite a bit of tax liability now but also some for later.

Essentially, the difference is in whether or not the dollar value written off in year 1 is whole or proportional. A company starting out that needs more cash on hand, or a company that expects its tax liability in future years to be less than today, would be wise to use Section 179. A company that expects to move into a higher tax bracket in the future and does not need the extra cash flow should almost certainly claim Bonus Depreciation.

Changes From Last Year

The only notable changes from 2022 are the increase on the maximum deduction amount and the maximum spending amount, which are now $1,160,000 and $2,890,000, respectively.

The tax code is complicated, however, and things are often updated by the IRS. Stay in contact with your local tax professional for updates as they come in from the Internal Revenue Service.

Conclusion

If there is one thing you need to know about the tax code, it is that it is complicated. The entire tax code is over ten million words in length, thousands of times longer than this article. Hopefully, however, this article can help you get a general understanding of how to apply Section 179 to better invest in your fleet now.

Of course, if you are interested in employing Section 179 to save money on your next large business asset purchase, TopMark Funding ™ brokers on your behalf to a variety of different lenders for your next semi-truck, sprinter van, or shuttle bus. Whether you have excellent or less-than-excellent credit, we communicate with lenders to get you your best possible rate! Contact us for a free no-obligation quote that will not impact your credit score.

This article does not constitute legal tax advice. Every business is different and as such has different tax needs. Talk to a certified tax preparer to fully utilize Section 179 to your business’ own advantage.

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