Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Section 179 Deductions for Asset Purchases
Transcript
- Lucas: Luna, I want to talk about a tax deduction that most wealthy families don't fully exploit, even though it's been on the books for decades: Section 179 of the Internal Revenue Code. Luna: Section 179 — that's the one that lets you immediately expense the cost of qualifying assets rather than depreciating them over time, right? Lucas: Exactly. And the numbers are surprisingly large. For 2025, the maximum deduction was one point sixteen million dollars. For 2026, it's adjusted for inflation — likely around one point two million. That's not chump change. Luna: So who's actually using this? I mean, is it just for factory owners buying forklifts? Lucas: Manufacturing equipment is a classic use case. But the list of qualifying property is much broader: off-the-shelf software, certain improvements to non-residential real estate — like roofs, HVAC, fire alarms — and even some vehicles used for business. For wealthy families with operating companies, this can be a massive tax deferral tool. Luna: Okay, give me a real example. Walk me through the math. Lucas: Sure. Let's take a family-owned precision machining business in Ohio. In 2025, they bought three new CNC machines for a total of eight hundred and eighty thousand dollars. Under Section 179, they deducted the entire amount in that tax year. Their effective tax rate dropped from 28 percent to about 17.6 percent. That's a cash savings of roughly one hundred and fifty thousand dollars. Luna: That's real money. But is there a limit? I thought Section 179 phases out once you spend too much. Lucas: Good catch. There is a phase-out threshold. For 2025, the deduction begins to phase out dollar for dollar once total qualifying asset purchases exceed two point eight nine million dollars. So if you spend three point five million, your deduction is capped at roughly five hundred and fifty thousand. But most family businesses don't hit that ceiling. Luna: And there's also a net income limitation, right? You can't create a loss with Section 179. Lucas: Right. The deduction cannot exceed the taxable income from the active conduct of the business. So you can't use it to generate a net operating loss. But any unused amount can be carried forward to future years. It's not lost, just deferred. Luna: How does this compare to bonus depreciation? I feel like people mix those up. Lucas: They do. Bonus depreciation is also an accelerated deduction, but it's typically a percentage — in 2025 it was 80 percent for qualified property. And bonus depreciation can create a net operating loss, unlike Section 179. Also, bonus depreciation applies to a broader set of assets, including used property. Section 179 generally requires new or new-to-you qualifying property. Luna: So if you're a wealthy family with a side business, you'd probably stack them: use Section 179 first, then bonus depreciation on the rest. Lucas: Exactly. And that's what the sophisticated family offices do. They plan the asset purchases in Q4, once they have a clear picture of their annual income. Then they optimize the mix of Section 179 and bonus depreciation to hit their target tax rate. Luna: I imagine this gets even more interesting when you layer in state taxes. Some states don't conform to Section 179. Lucas: That's a critical point. States like California, New York, and New Jersey have not fully adopted the federal Section 179 rules. So you might get the deduction on your federal return but have to add it back for state purposes. That can create a deferred tax liability. Wealthy families with multistate operations need a good CPA who understands state-level conformity. Luna: What about the broader political picture? Section 179 is popular — it's been around since 1958 — but with tax reform talks... Lucas: Right. The Tax Cuts and Jobs Act of 2017 temporarily expanded Section 179 limits and bonus depreciation. The higher limits are set to phase down after 2027 unless Congress acts. For wealthy families doing long-term capital planning, there's a risk that the one point two million limit could drop back to around five hundred thousand. So there's a bit of a use it while it's-hot dynamic. Luna: That's interesting. So some families might accelerate purchases they were planning for 2028 into 2026 or 2027. Lucas: Exactly. And that's a conversation we're already hearing from family offices: 'Should we pull forward that equipment upgrade?' It's a timing game, but a legitimate one. Luna: Is Section 179 ever used in a real estate context? I know you mentioned improvements, but what about for rental properties? Lucas: It's trickier. Rental activities are generally considered passive, and Section 179 requires active conduct of a trade or business. So a typical residential landlord can't use it. But if you have a real estate professional designation under IRS rules — meaning you spend more than 750 hours per year managing properties — then you can. Some family offices that run large multifamily portfolios do qualify. Luna: What about vehicles? I've heard of people buying a heavy SUV and writing it off. Lucas: Yes, but there are special limits for vehicles. For passenger automobiles, Section 179 is capped at about eleven thousand dollars in the first year. But if the vehicle is over six thousand pounds gross vehicle weight — think a loaded Suburban or a heavy pickup — it's classified as a 'heavy vehicle' and you can deduct up to twenty-five thousand dollars under Section 179. The rest can be bonus-depreciated. So yes, that's a legitimate strategy, but it's often overhyped by social media tax bros. Luna: It's not just a loophole; it's a real business expense. If you actually use the vehicle for business, it makes sense. Lucas: Exactly. The IRS has a 'predominant use' test. Over 50 percent business use. And if you later drop below that, there's recapture. So it's not a freebie. Luna: I think a lot of our listeners — high-net-worth families — might overlook Section 179 because they think of it as a small-business thing. But for a family with multiple operating entities, the aggregate benefit can be huge. Lucas: Absolutely. And that's the angle I want to emphasize. A family office might oversee a manufacturing company, a real estate development firm, and a tech startup. Each entity can independently use Section 179 for its own qualifying purchases. So you could have three separate deductions of up to one point two million each. That's three point six million in immediate expensing, all in one year. Luna: Wow. That's a powerful estate planning tool too — you can reduce taxable income from the operating entities, leaving more cash in the family for investments or gifting. Lucas: Exactly right. And if the family is also doing charitable giving through a donor-advised fund or a private foundation, the tax savings from Section 179 can fund those contributions. It's all connected. Luna: One thing I want to clarify: is Section 179 available for software? Because I think a lot of people don't realize that. Lucas: Yes. Off-the-shelf software — not custom developed — qualifies. So if a family business buys a CRM system or accounting software for fifty thousand dollars, they can expense that immediately under Section 179. That's a nice benefit for digital infrastructure investments. Luna: Let's talk about the documentation burden. What kind of records does the IRS expect? Lucas: You need to show that the asset was placed in service during the tax year, that it qualifies under Section 179, and that you have the business use percentage. For vehicles, you need a mileage log. For equipment, purchase invoices and dates. The IRS does audit Section 179 claims, especially large ones, so proper documentation is essential. Luna: I recall that the IRS has been cracking down on inflated Section 179 claims for vehicles, especially where people try to write off personal use. Lucas: Yes, and that's a risk for wealthy families who might have multiple vehicles. If the business use is below 50 percent, the entire deduction can be disallowed and recaptured with penalties. So the key is: only claim what you can substantiate. Luna: So what's the one takeaway you want our listeners to remember? Lucas: If you have an active trade or business — especially a capital-intensive one — review your asset purchases before year-end and see if Section 179 can reduce your tax bill. Even if you're not planning new purchases, accelerating planned purchases into the current year could lock in a deduction before the limits potentially drop. Luna: That's a solid take. And it's one of those planning moves that can yield immediate cash savings. Lucas: Before we wrap, I want to mention something. We do this show ad-free, and we keep it that way because of listeners who support us directly. If these conversations have helped you think about a tax or investment decision differently, you can support the show at buy me a coffee dot com slash fexingo. It's a small gesture that lets us stay independent, and we really appreciate it. Luna: Yes, and it's entirely optional, but every bit helps us keep digging into topics like this one. Now, back to Section 179 — one last nuance: the deduction is taken on Form 4562, and it's important to file it correctly, because the IRS matches it against the asset's placed-in-service date. Lucas: Right. And if you're subject to the alternative minimum tax, AMT, Section 179 is generally allowed for both regular tax and AMT purposes, which is a big plus. Bonus depreciation, on the other hand, can sometimes be an AMT preference item. Luna: Good to know. So Section 179 is actually more friendly for families in AMT territory. Lucas: Exactly. And with the AMT exemption amounts potentially changing under future tax legislation, that could become even more relevant. Luna: Alright, Lucas. I think we've given our listeners a solid roadmap. Any final thought? Lucas: Just this: Section 179 is a tool, not a strategy by itself. It works best when integrated into a holistic tax plan that considers state taxes, AMT, estate planning, and the family's long-term capital needs. Talk to your tax advisor — and make sure they know your full entity structure. Luna: Great advice. Thanks, Lucas. And thanks to our listeners for spending time with us. Lucas: Until next time, keep your assets working hard.