Can I use Section 179 on used equipment?

Can I Use Section 179💡 Definition:A tax deduction that allows businesses to deduct the full cost of qualifying equipment in the year it's purchased. on Used Equipment?

When it comes to optimizing your business's tax strategy, understanding the nuances of deductions can make a significant difference. Section 179 of the IRS tax code is one such provision that allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. This can be a game-changer for small and medium-sized businesses looking to reduce their taxable income💡 Definition:Income that's actually taxed after subtracting deductions from AGI. Used to determine tax bracket and total tax owed.. But what about used equipment? Let's explore whether Section 179 can be applied to used assets💡 Definition:Wealth is the accumulation of valuable resources, crucial for financial security and growth. and how to make the most of this opportunity.

Understanding Section 179 for Used Equipment

Qualifying Criteria

Yes, you can use Section 179 on used equipment, provided it meets specific criteria. Here’s what you need to know:

• New to Your Business: The equipment, though used, must be new to your business. This means you cannot claim the deduction on equipment that your business already owns or has previously used.

• Tangible, Depreciable Property💡 Definition:An asset is anything of value owned by an individual or entity, crucial for building wealth and financial security.: The equipment must be tangible, depreciable property that you use in your active business operations. This includes machinery, office furniture, computers, and specific vehicles.

• Business Usage: The equipment must be used more than 50% for business purposes in the year it is placed into service. If the usage is partly personal, the deduction is proportionately reduced.

• In-Service Requirement: The equipment must be placed in service by the end of the tax year, December 31, to qualify for the deduction in that year.

Deduction Limits

For 2025, the deduction limit for Section 179 has been significantly increased. Businesses can deduct up to $2.5 million in qualifying equipment purchases, with a maximum capital purchase threshold of $4 million. If your equipment investments exceed this threshold, the excess does not qualify for Section 179 but may still be eligible for bonus depreciation💡 Definition:The decrease in value of an asset over time due to wear, age, or market conditions..

Real-World Scenario

Consider a business that buys a used piece of machinery for $120,000. If this machinery is new to the business and placed in service by December 31, 2025, the company can deduct the entire $120,000 purchase price under Section 179. However, if the machinery is used 70% for business and 30% for personal purposes, the deductible💡 Definition:The amount you must pay out-of-pocket before insurance coverage kicks in. amount will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. be $84,000 (70% of $120,000).

Common Mistakes and Considerations

Bonus Depreciation Interaction

After reaching the Section 179 spending cap, businesses may elect to use bonus depreciation for additional qualifying assets. For equipment placed in service after January 19, 2025, bonus depreciation is available at 100%. This can further enhance tax savings💡 Definition:Frugality is the practice of mindful spending to save money and achieve financial goals., especially for larger purchases.

Documentation and Compliance💡 Definition:Compliance ensures businesses follow laws, reducing risks and enhancing trust.

Proper documentation is crucial when claiming Section 179 deductions. Businesses must file Form 4562, which details depreciation and amortization💡 Definition:The process of paying off a loan through regular payments that cover both principal and interest., along with their tax return💡 Definition:A tax refund is money returned to you by the government when you've overpaid your taxes, providing extra cash flow.. Ensure that all records of purchase and usage are meticulously maintained to avoid any issues with the IRS.

Prohibited Acquisitions

Be aware that not all purchases qualify for this deduction. Equipment inherited, received as a gift, or acquired from related parties—such as family members or subsidiary companies—cannot be claimed under Section 179.

Bottom Line

Section 179 offers a powerful incentive for businesses to invest in equipment, including used assets, by allowing them to deduct the full purchase price in the year the equipment is placed into service. To maximize this benefit, ensure that the equipment is new to your business, meets the business usage criteria, and is properly documented. By understanding and leveraging both Section 179 and bonus depreciation, your business can significantly reduce its taxable income and reinvest those savings into growth opportunities. Always consider consulting with a tax professional to tailor these strategies to your specific business needs.