Business owners sometimes think that Section 179 is a complicated and hard-to-avail tax code that won't benefit them. But that is far from the truth, as you'll see in this article.
What is Section 179?
Section 179 is a section of the US internal revenue code that allows businesses to deduct property costs when eligible. Under the section, businesses using properties as services can deduct their cost as expenses. The Internal Revenue Service (IRS) introduced Section 179 to provide relief to businesses and it allows them to depreciate business assets like equipment, machinery, and vehicles, including Automated Guided Vehicles (AGV), in the first year they put these assets into service.
Normally, depreciation is spread across several years an asset remains in service and businesses take a tax deduction for a percentage of the cost every year. Section 179, however, allows businesses to take all the cost of an asset as a deduction in the first year of service. In simple terms, it speeds up the deduction processes. Furthermore, along with the Section 179 deduction, businesses can also apply for an additional 100% bonus depreciation on new business assets (new to the business, not necessarily brand new) in the first year of service. Until January 1st, 2023, the bonus depreciation will remain at 100%.
Read More: ROI for Automated Guided Vehicle Systems
How Do Section 179 Deductions Work for AGVs?
There are two general requirements for business property, such as AGVs, to qualify for a Section 179 deduction by the IRS. The first one is that a property can become qualified property if it is depreciable and tangible. The personal property you use for business or trade also qualifies for Section 179. You must use the property, in this case, the AGV, for business purposes for at least over 50% of the time and the deduction only applies to the percentage you use it for business purposes.
Since AGVs aren't passenger cars, their uses outside your business are almost non-existent, meaning that you'll use it 100% for your business so you can avail 100% of the deduction. In the case of other business properties like cars, you may not be able to claim 100% deductions if you are using them for non-business related purposes. For instance, if you use a car for business purposes 60% of the time, you can only avail the deduction on 60% of the car's cost. You can't claim the Section 179 deduction on assets that you don't use for business purposes more than 50% of the time.
To claim the Section 179 deduction, you must purchase and use the asset in the same year you want to file a claim. For AGVs, we recommend placing an order in the first quarter of the year because AGVs may take some time to build and install depending on the complexity of the system. If you are thinking about buying an AGV in 2021 and want to benefit from the Section 179 deduction, then place your order as soon as possible or by early January. The cost of an AGV ranges from $10,000 to $1 million, which is under the annual limit of the deduction (more on this later). It is also important to remember that if you purchase an asset but don't use it, then it wouldn't qualify for the deduction.
The following types of business properties may qualify for Section 179 deductions.
- Listed property
- Equipment and machinery
- Business vehicles with a gross weight of 6,000-14,000 pounds (AGVs fall under this category)
- Property that isn't physically attached to the building like free-standing shelves, computers, furniture, etc.
- Costs of improvements to the interior of the building, roofing, security systems and alarms, fire suppression, and HVAC.
Section 179 isn't applicable for land and land improvements like fences or pools. A tax professional will guide you best about these exclusions and restrictions.
Under normal circumstances, if you purchase an AGV for $200,000 with zero salvage value and use it strictly for business purposes, then you depreciate it for $40,000 per year over the course of 5 years. But with the Section 179 deduction, you can write off the $200,000 in a single year (as long as the year of purchase, service, and claim are the same).
How to Take Section 179 Deduction on AGVs?
As mentioned earlier, you must order an AGV in the first quarter because it may take some time to build the vehicle. Furthermore, for an AGV to qualify for the Section 179 deduction, you need to do the following.
- Purchase and use the AGV in the same year.
- At tax time, sit down with your tax professional with records of the date of purchase, date of service, and all the related costs.
- Fill out the Section 179 deduction form and include it in your business tax return.
IRS form 4562 is the form you need to fill to avail the Section 179 deduction on AGVs. This form collects the necessary information about the AGV or any other business property, including the date you put them in service. You may also use this form to take a bonus depreciation deduction, claim a depreciation deduction and to make a Section 179 election.
If you avail the Section 179 deduction for the partial cost of an asset, then you may able to depreciate the cost that you not deduct. Meaning, that you can distribute the remaining amount throughout the lifetime of an asset.
What are the Annual Limits on Section 179 Deductions?
The maximum tax deduction for 2021 on an individual assets is $1,050,000 million. The 2021 spending cap on equipment purchases is $2,620,000 with a bonus depreciation of 100%.