Understanding Section 179: A Powerful Tax Savings Tool
Section 179 of the IRS tax code is one of the most aggressive tax incentives available to small and medium-sized businesses, and for the 2025 tax year, the rules have changed dramatically. It allows you to deduct the full purchase price of qualifying equipment in the year you buy it, rather than depreciating it over several years.
For Dallas businesses making equipment purchases through equipment financing, understanding Section 179 can mean significant tax savings. This comprehensive guide explains everything you need to know.
What Is Section 179?
Section 179 allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. Instead of depreciating the cost over 5, 7, or more years, you deduct the entire amount in year one.
Historical Context & The 2025 Shift
Section 179 was designed to encourage small businesses to invest in themselves. While the deduction limits have historically increased with inflation, 2025 marks a massive shift due to the “One Big Beautiful Bill Act” (OBBBA). This legislation effectively doubled the deduction power for business owners compared to previous years.
2025 Section 179 Limits (The New Rules)
The IRS adjustments for the 2025 tax year (filed in 2026) are significantly higher than previous projections. These new limits offer unprecedented capacity for reinvestment:
| Limit Type | Amount |
|---|---|
| Maximum deduction | $2,500,000 |
| Phase-out threshold | $4,000,000 |
| Bonus depreciation | 100% (Restored for 2025) |
Understanding the Phase-Out
Once your total equipment purchases exceed the phase-out threshold, your Section 179 deduction begins to decrease dollar-for-dollar. If you purchase more than $6,500,000 in equipment, the Section 179 deduction is completely eliminated.
Example:
- Total equipment purchases: $4,500,000
- Phase-out threshold: $4,000,000
- Amount over threshold: $500,000
- Maximum deduction reduced by: $500,000
- Available Section 179 deduction: $2,000,000
Qualifying Equipment for Section 179
Not all business purchases qualify for Section 179. Here is what does and does not qualify:
Qualifying Equipment
- Machinery and manufacturing equipment
- Computers and software (off-the-shelf software only)
- Office furniture and fixtures
- Business vehicles (with limitations)
- Equipment purchased for business use
- Certain building improvements (HVAC, fire protection, security systems, roofing)
- Leasehold improvements
Non-Qualifying Items
- Real estate (buildings themselves)
- Land
- Inventory
- Equipment used outside the United States
- Property acquired from related parties
- Equipment used 50% or less for business
Used Equipment Qualifies
An important feature of Section 179: the equipment does not have to be new. Used equipment qualifies as long as it is new to your business.
Business Vehicle Deductions
Business vehicles have special rules under Section 179, and the interaction with the new bonus depreciation rules creates a unique opportunity for 2025.
Heavy SUVs and Crossovers (Over 6,000 lbs)
Vehicles with a gross vehicle weight rating (GVWR) over 6,000 pounds but less than 14,000 pounds have a Section 179 deduction cap of $31,300 for 2025.
Pro Tip: While Section 179 is capped at $31,300 for these vehicles, you can often use 100% Bonus Depreciation to write off the remaining balance. This effectively allows you to deduct the full cost of a heavy SUV (like a Chevrolet Tahoe or Ford Expedition) in the first year, bypassing the cap.
Heavy Vehicles
Vehicles over 14,000 pounds GVWR (heavy trucks, buses, etc.) can qualify for the full Section 179 deduction without the $31,300 cap.
Passenger Vehicles
Regular cars and light trucks (under 6,000 lbs) have much lower depreciation limits, generally capped around $20,400 for the first year.
How to Claim Section 179
Claiming your Section 179 deduction requires proper documentation and tax forms.
Step-by-Step Process
- Purchase qualifying equipment before December 31 of the tax year
- Place the equipment in service during the tax year (not just purchase it)
- Keep documentation including invoices, receipts, and proof of payment
- Complete IRS Form 4562 (Depreciation and Amortization)
- Attach Form 4562 to your business tax return
- Maintain records for the life of the equipment plus 3 years
Key Requirement: Placed in Service
The equipment must be placed in service during the tax year to qualify. This means it must be set up and ready for use in your business, not just purchased.
Section 179 vs. Bonus Depreciation
Section 179 is often confused with bonus depreciation, but the 2025 OBBBA legislation has brought them closer together in power. Here are the key differences:
| Feature | Section 179 | Bonus Depreciation |
|---|---|---|
| Deduction limit | $2,500,000 | No limit |
| Phase-out | Yes ($4,000,000) | No |
| Used equipment | Qualifies | Qualifies |
| Can create a loss | No | Yes |
| Year-by-year election | Yes | Applies to all qualifying property class |
| 2025 rate | 100% of limit | 100% (Restored) |
Using Both Together
Many businesses use Section 179 and bonus depreciation together to maximize deductions, especially for vehicles:
- Apply Section 179 deduction first (up to the $2,500,000 limit or vehicle cap)
- Apply bonus depreciation (100% in 2025) to remaining cost
- Depreciate any remaining amount over the asset’s useful life
Example:
- Equipment cost: $3,000,000
- Section 179 deduction: $2,500,000
- Remaining cost: $500,000
- Bonus depreciation (100%): $500,000
- Total first-year deduction: $3,000,000
Financing and Section 179
A common question: can you claim Section 179 on financed equipment? Yes, absolutely.
How Financed Equipment Qualifies
When you finance equipment, you can claim Section 179 on the full purchase price, not just your down payment. This creates a substantial cash flow advantage.
Example:
- Equipment cost: $500,000
- Down payment: $50,000
- Financed amount: $450,000
- Section 179 deduction: $500,000 (full purchase price)
Tax Savings Can Exceed Down Payment
In some cases, your tax savings from Section 179 can actually exceed your down payment, effectively giving you a net gain in year one.
Illustration:
- Equipment: $200,000
- Down payment (10%): $20,000
- Section 179 deduction: $200,000
- Tax bracket: 32%
- Tax savings: $64,000
- Net benefit in year one: $44,000 positive cash flow
Limitations and Restrictions
Understanding Section 179 limitations helps you plan effectively:
Business Income Limitation
Section 179 deductions cannot exceed your business’s taxable income for the year. You cannot use Section 179 to create a business loss.
However, any unused Section 179 deduction can be carried forward to future tax years.
Business Use Percentage
If equipment is used partly for personal purposes, only the business-use percentage qualifies for Section 179.
Example:
- Vehicle cost: $80,000
- Business use: 80%
- Qualifying amount: $64,000
Related Party Transactions
Equipment purchased from a related party (family member, affiliated company) generally does not qualify for Section 179.
Strategic Planning Tips
Maximize your Section 179 benefits with these strategies:
1. Time Your Purchases
If you are close to year-end and considering equipment purchases, buying before December 31 allows you to claim the deduction in the current tax year.
2. Consider Your Taxable Income
Since Section 179 cannot create a loss, estimate your taxable income before making large equipment purchases. If income will be higher next year, waiting might make sense.
3. Combine with Financing
Using equipment financing allows you to claim Section 179 on the full purchase price while preserving cash flow.
4. Document Everything
Keep detailed records of purchase dates, costs, business use percentages, and when equipment was placed in service.
5. Work with a Tax Professional
Section 179 interacts with many other tax provisions. A qualified tax professional can help you optimize your overall tax strategy.
Common Mistakes to Avoid
Mistake 1: Missing the Deadline
Equipment must be purchased AND placed in service by December 31. Do not wait until the last minute.
Mistake 2: Forgetting Documentation
Without proper documentation, your deduction can be challenged. Keep all receipts, invoices, and financing documents.
Mistake 3: Ignoring Business Use Rules
If equipment is used partly for personal purposes, only the business portion qualifies. Document business use carefully.
Mistake 4: Not Considering State Taxes
Some states do not fully conform to federal Section 179 rules.
Texas Update: For the 2026 franchise tax report (covering the 2025 year), Texas has updated its rules to conform with the federal bonus depreciation changes. This means Texas businesses can now align their Cost of Goods Sold (COGS) deductions more closely with their federal returns.
Mistake 5: Overlooking Bonus Depreciation
Section 179 alone may not maximize your deduction. Consider bonus depreciation for remaining costs.
Section 179 for Dallas Businesses
Dallas-area businesses across many industries benefit from Section 179:
- Construction companies purchasing heavy equipment
- Medical practices acquiring diagnostic equipment
- Restaurants upgrading kitchen equipment
- Manufacturing firms adding production machinery
- Transportation companies expanding their fleets
- Technology companies purchasing servers and equipment
Work with Experts Who Understand Equipment Financing
At Equipment Financing Dallas Pros, we understand how equipment financing and tax planning work together. We help Dallas businesses structure their equipment purchases to maximize tax benefits while managing cash flow.
Planning an equipment purchase? Contact us to discuss how financing can help you take advantage of Section 179 while preserving your working capital.
Disclaimer: This article provides general information about Section 179. Tax situations vary, and you should consult with a qualified tax professional for advice specific to your situation.