Section 179 Tax Deduction is More Important Than Ever in 2022

Updated Aug 25, 2022
Aerial photo of an excavator digging
Getty Images

Taking the Section 179 tax deduction might mean more to companies in 2022 than any year in recent memory.

For those who may not be familiar with it, Section 179 is the IRS business tax deduction that allows companies to deduct the full price of new or used business equipment. This year, the deduction is $1,080,000, meaning a business can deduct the full cost of more than $1 million worth of acquired equipment that is purchased, leased or financed.

The equipment must be both purchased and put into service during the calendar year, so you have until midnight on December 31 to acquire it, plug it in, gas it up and start it, or similar.

The good news is most tangible business equipment and work vehicles qualify (again, both new or used), and any size business can take the deduction. Even the smallest contractor buying one generator can deduct the full cost of it.

The reason this tax deduction is so important this year is many companies are seeing their projections and numbers shrink as inflation and rising interest rates continue to be the news of the day. So, taking a deduction on the entire cost of acquired equipment (as opposed to yearly depreciation) can make a very large difference to 2022’s bottom line.

One instance many might not be aware of is that the deduction can be taken whether the equipment was outright purchased or leased/financed. That last part is particularly interesting since the amount of tax money saved from the deduction can very well exceed the payments made in 2022, making it a net gain for the year.

To give an example of this, say a company finances an excavator in September 2022. The total cost was $150,000. The payments of $2,700 begin in October. That would equate to three months of payments made in 2022 for a total of $8,100 (these are all rough figures for illustration purposes).

The company then takes a Section 179 deduction on the machine for the full amount ($150,000). At a 35% tax rate, that equates to a net tax savings of $52,500. That $52,500 comes right off the tax bill and stays in the company’s bank account. The $52,500 in net tax savings minus the $8,100 paid out equals $44,400.

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By acquiring the equipment, the company’s 2022 is $44,400 better than it would have been had it not acquired the equipment at all. Plus, they get to use the equipment.

This is why Section 179 can matter so much in 2022. Yes, in this scenario, you’re taking the deduction all at once instead of spreading it out, but for most companies, money now is superior to money later. Especially in the business climate we find ourselves in.

Of course, this is not to be taken as outright tax advice. Always speak to your accountant or tax professional for what makes the most sense for your company. But even if you’ve always taken normal depreciation in the past, Section 179 might make more sense in 2022. Especially if the rising rates we’re seeing do tame inflation. 2023 might be looking much better than today, so again, money now is often better than money later.

One last aspect of this for sellers of equipment: if you are not making buyers aware of Section 179 in your marketing, you should be. The number of businesses not familiar with Section 179 is substantial, and reminding potential buyers of the tax savings could very well be the catalyst that turns a “maybe” into a “yes.”

Section 179 was put into place years ago to encourage businesses to invest in themselves, and it remains the best business tax deduction available. And in 2022, it’s more important than ever, and should at least be considered.

Chris Fletcher is the vice president of national accounts at Crest Capital, which offers small and mid-sized companies financing for new and used equipment, vehicles and software, as well as offering equipment sellers a  financing program. www.crestcapital.com  

All views expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates.