Making the move to start a shredding business is a big step. However, you’re not alone in your venture. In the States, the government has implemented the Section 179 tax deduction that lets a business deduct the full purchase price of equipment in the year it is purchased instead of writing off small amounts. The best part is the Section 179 deduction applies to both new and used equipment.

So, what is a Section 179 deduction exactly?

According to Investopedia, Section 179 of the U.S. internal revenue code is an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time. The Section 179 deduction can be taken if the piece of equipment is purchased or financed, and the full amount of the purchase price is eligible for the deduction.

Who is eligible for a Section 179 deduction?

While there are some restrictions that apply with regards to receiving this tax grant, Section 179 states that the equipment must: 

• Within the dollar limits set forth in Section 179. For 2021, The maximum amount you can elect to deduct for most section 179 property you placed in service in tax years beginning in 2021 is $1,050,000, according to the Internal Revenue Service (IRS), which limits the total amount of the equipment purchased to a maximum of $2,620,000 in order to qualify. 

• Equipment must be used in the same year the deduction is being taken. For 2022, you must purchase the equipment AND start using it for your business by December 31, 2022. 

• Purchased and used for business. If the equipment or machinery you purchased is not used on a regular basis within your business you may not qualify. 

Another thing to acknowledge is that the Section 179 tax deduction is limited to your business’ net income for the year. Therefore, if you have a net income of $75,000 before taking the Section 179 tax deduction into account, and you then purchase a $100,000 piece of machinery or equipment you will only be entitled to $75,000. At that point, you can opt to take regular depreciation on the remaining assets.

How do I qualify for a Section 179 deduction?

• Your asset must be tangible. Physical property such as shredding trucks, equipment, and machinery will qualify for Section 179. However, Intangible assets like patents or copyrights do not. 

• Purchased. Rented machinery does not qualify for this tax deduction. 

• Used more than 50% in your business. As mentioned previously, the piece of machinery or equipment you purchase for your business must be used daily. An asset that is mainly for personal use but used for the business on occasion isn’t eligible. 

• Not purchased or gifted from relatives. This includes siblings, spouses, parents, grandparents, and descendants with which you have a relationship. 

In conclusion, taking the cost of the equipment as an immediate expense deduction allows the business to get an immediate break on their tax burden whereas capitalizing then depreciating the asset allows for smaller deductions to be taken over a longer period. Therefore, the Section 179 tax deduction is offered as an incentive for small business owners to grow their businesses with the purchase of new equipment and is a benefit to consider when starting your own business.

Citations:

Hayes, A. (2022, May 22). Section 179. Investopedia. Retrieved May 27, 2022, from https://www.investopedia.com/terms/s/section-179.asp. 

Ritchie Bros. Auctioneers. (n.d.). Blog. Ritchie Bros. Auctioneers. Retrieved May 27, 2022, from https://www.rbauction.qc.ca/blog/it%E2%80%99s-that-time-again-make-section-179-work-for-you-and-save-thousands-by-financing-equipment  

Section 179 deduction: A simple guide: Bench accounting. Bench. (n.d.). Retrieved May 27, 2022, from https://bench.co/blog/tax-tips/section-179-deduct...