Section 179 Limits: Annual Deduction Caps and Phase-Out Thresholds

Three Limits on Section 179

Section 179 has three annual limits that must be checked each year, as they are adjusted for inflation. Understanding these limits is essential for planning major equipment purchases.

Dollar Limit: Maximum Annual Deduction

The first limit is the maximum deduction amount. This is a hard annual cap (approximately $1.2 million as of recent tax years, adjusted for inflation). If you purchase qualifying property costing more than this amount, the excess must be depreciated using normal depreciation methods.

Investment Limit: Phase-Out Threshold

The second limit is the investment phase-out threshold (approximately $3 million as of recent tax years). Once total qualifying property purchases exceed this amount, the Section 179 deduction phases out dollar-for-dollar. For every $1 spent above the investment limit, your maximum Section 179 deduction is reduced by $1.

For example, if you spend $100,000 above the investment limit, your maximum Section 179 deduction is reduced by $100,000. This ensures the benefit is targeted at small and mid-size businesses rather than large enterprises.

Taxable Income Limit

The third limit is that Section 179 cannot create or increase a net operating loss. Your Section 179 deduction is limited to your aggregate taxable income from all active trades or businesses. If your Section 179 deduction would exceed your business income, the excess carries forward to future tax years when you have sufficient income to absorb it.