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What is a Depreciation Deduction?

By Osmand Vitez
Updated Feb 07, 2024
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A depreciation deduction is a specific deduction relating to a company’s business tax liability. The Internal Revenue Service (IRS) allows companies to completely write off certain business expenditures against their annual income rather than depreciating them over a period of time. This type of deduction is known as section 179 property and must meet certain specification or restrictions prior to the company writing off the expense. In general, the deduction for qualifying property is $500,000 US Dollars (USD) in 2010 and 2011, an increase due to the passage of the Small Business Jobs Act.

Companies can have their section 179 depreciation deduction reduced if the total property value relating to this deduction exceeds $2,000,000 USD in one calendar year. Additionally, companies cannot use the depreciation deduction to turn their annual net income from a gain to a loss. For example, if the company has $150,000 USD in annual income, it can only claim the section 179 deduction for $150,000 USD, not the full $500,000 USD allowed. This prevents companies from claiming current losses through the deduction and applying them to future years, artificially reducing their tax liability.

Vehicles owned and used by a company face specific restrictions for section 179 depreciation deductions. Passenger vehicles have a $3,060 USD dollar limit and trucks or vans have a limit of $3,160 USD depreciation deduction limit. Companies that do not use these vehicles entirely for business-purposes can face reductions in the section 179 deduction limit.

Companies choose the section 179 deduction because it allows for immediate reduction of a company’s tax liability. Normal depreciation will calculate an annual depreciation amount that will reduce the company’s tax liability. Rather than extending the depreciation expense for future years, claiming a section 179 deduction can help the company earlier rather than later. This can help the company retain more capital in the company currently and use it for new projects in the upcoming year.

To use a section 179 deduction, companies simply fill out a specific IRS form and send it in with their normal business taxes. Business owners and managers must ensure their equipment or other assets meet current qualifications for the deduction. Company management may also desire their financial staff to conduct an analysis on whether or not the depreciation deduction makes sense for their current business operations. For example, companies may find that high depreciation expenses spread out over a longer period of time will provide more financial benefit than a one-time deduction.

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