Section 179 is a type of tax deduction that lets you deduct up to $1 million in equipment and other fixed assets as a business expense on your tax return. This provides significant tax savings compared to depreciating the assets over several years.
Our Section 179 calculator helps you determine how much you can deduct on your tax return.
To use our Section 179 calculator, you’ll first need to input the cost of the equipment, the estimated life of the equipment, and your marginal tax rate. These are the three variables that determine how much you’ll save by electing the section 179 deduction vs standard depreciation methods.
If you’re unsure of your tax rate, use last year’s tax return as a guide. Ask your accountant what your marginal tax rate is or use the marginal tax rates for 2018 found in IRS Publication 505.
The Section 179 calculator has three inputs, which are needed to calculate the tax savings of taking a Section 179 deduction. You’ll enter the value of equipment your business purchased during the year, the estimated useful life of the equipment, and your marginal tax rate.
The inputs required to use the Section 179 calculator are:
· Value of equipment: This is the price that you paid for the equipment
· Estimated lifetime: This is the amount of time the equipment is expected to remain in working condition
· Marginal tax rate: This is the tax bracket that you fall into
The Section 179 calculator provides two outputs: estimated tax savings for the first year, and estimated tax benefits over the lifetime of the assets. These results estimate how much tax you could save by choosing the Section 179 deduction for your equipment purchases.
This is the estimated amount of tax you will save by electing Section 179 deduction instead of straight-line depreciation. The estimated first-year tax savings takes into account the fact that you will have some tax savings ― one year’s worth of depreciation ― if you choose ordinary straight-line depreciation instead of the 179 deduction.
Be aware that there are other depreciation methods like MACRS depreciation. Our section 179 calculator does not factor other depreciation methods into the tax savings.
Since you are getting your tax savings upfront, instead of over the life of the equipment, you have additional money that you can re-invest in your business. This also has a benefit since you might otherwise need to take out a loan to invest the same amount of capital back into your business. This is lifetime benefit also goes by the name of the time value of money.
To calculate this lifetime benefit, we assume that you would need to borrow the same amount of the tax savings at an interest rate of 12%.
In our example, let’s say a restaurant buys equipment that has a 10-year useful life and a value of $50,000. Let’s also assume the restaurant owner’s marginal tax rate is 37% on the business income. With section 179 deduction, the restaurant will save $16,650 in year one and $9,990 over 10 years.
The section 179 calculator outputs for this example are:
· First-year savings = $16,650: This is the additional tax savings of claiming the Section 179 deduction instead of straight-line depreciation
· Lifetime benefit = $9,990: This is an estimate of how much interest expense you could avoid by reinvesting your tax savings from the Section 179 deduction back into your business instead of taking out a loan
Most equipment, furniture, and other tangible property purchased for your business qualify for the Section 179 deduction. There are three general rules to qualify for the Section 179 deduction: your business must acquire the equipment by purchase, your business must start using the equipment during the year, and the equipment is tangible property.
Examples of what’s eligible for Section 179 includes:
· Business appliances, such as ovens, baking equipment, and so on
· Office equipment, such as computers, fax machines, phones, and so on
· Office furniture, such as desks, chairs, and so on
· Property attached to a building, such as grocery store counters and signage
· Business vehicles with a gross vehicle weight in excess of 6,000 pounds (see the complete list of vehicles eligible for the Section 179 deduction)
· Software bought off-the-shelf
· Manufacturing equipment and tools
· Livestock, such as cattle, sheep, and goats
Equipment that is purchased for both business and personal use qualifies for Section 179, but your deduction will be based on the percentage of time that you use the equipment for business purposes.
Leased equipment is eligible for Section 179 only if your lease is structured as a capital lease, such as a buyout lease. Fair market value leases are not eligible for the Section 179 deduction. Instead, you deduct your monthly lease payments as a business expense.
The Section 179 deduction is not automatic. You have to elect to use the Section 179 deduction. Electing the Section 179 deduction is done by submitting IRS Form 4562 with your tax return.
If you do your own taxes, we recommend TurboTax because it will walk you through the steps to complete the tax form for the Section 179 deduction.
Below is a snapshot of the section of Form 4562 that must be completed to elect the Section 179 deduction:
Be sure to keep records of the equipment you bought for your business during the year. If the IRS asks any questions, you will need to prove that you bought equipment and started using the equipment for business purposes. Consider using accounting software, such as QuickBooks, to keep track of your equipment purchases throughout the year.
The FitSmallBusiness Section 179 calculator is designed for small and mid-sized businesses that spend less than $1 million on equipment. Alternatives to the section 179 deduction include the special bonus depreciation and MACRS depreciation.
Section 179 deduction alternatives include:
· Special bonus depreciation: A good option if your business bought more than $1 million in equipment; this is also a good option for cars since the bonus depreciation limit is $18,000 per car, compared to the $10,000 limit per car for the Section 179 deduction
· MACRS depreciation: A good option if your business expects to have more revenue over the next few years; with MACRS, your depreciation deductions are spread over several years, thus reducing taxes over multiple years
Like any calculator, the FitSmallBusiness section 179 calculator has limitations. Our Section 179 calculator does not take into account the varying nature of the tax rates. Nor does our Section 179 calculator take into account the self-employment tax or other surtaxes faced by business owners. However, for a relatively small deduction that falls within a tax bracket, this section 179 calculation provides a reasonable estimate of tax savings.