Now or Later: Should You Consider Section 179 for Your Business?

Section 179 expensing can be a very powerful tax-planning tool for small- and medium-sized businesses acquiring capital assets. While it doesn’t change the amount of depreciation you can take over the life of a capital purchase, it can change the timing by allowing you to deduct your purchase in the first year you place it in service.

How does Section 179 work?

Generally, when you purchase a piece of equipment for your business – say a $10,000 computer system – you can’t deduct the entire cost in the year it was purchased. It must take the expense by depreciating the cost over several years.

Section 179 allows you to deduct the cost of the $10,000 computer in the year it was purchased and placed in service. You can deduct the expense of up to $510,000 of qualified property. The $510,000 deduction begins phasing out dollar for dollar if $2.03 million or more of qualified property is purchased during the year (meaning it phases out completely after you’ve purchased $2.54 million in business capital assets).

Explains Chris Cicalese: “While Section 179 provides a great tool to accelerate expenses that would otherwise be over time, you take most of your deduction during the first year. If you Section 179 a $50,000 asset by the whole amount and you 100% financed it, you will deduct everything the first year, but will still be paying the loan during the life of the asset while only deducting interest expense.”

What is qualified property?

Qualified property includes things like tangible personal property, computer software and qualified real property (e.g., interior building costs for nonresidential buildings).

Section 179 doesn’t apply to property acquired for use in a rental property if it’s not your trade or business but simply an investment. Some vehicles qualify for Section 179 expensing, within limits. (The limits were brought about when some business owners bought expensive Hummers and expensed the cost in a single year.)

Facts about Section 179

If you are considering your options for depreciating your business assets under Section 179, here are important details to remember:

• Section 179 allows deducting the expense of up to $510,000 of qualified business purchases.
  “If you buy used equipment, that property still qualifies for Section 179,” adds Ren Cicalese III, CPA, MST.
• A Section 179 deduction cannot create a loss for the business.
• A Section 179 deduction must be for business use. If an asset is not entirely used for business, the allowance is reduced.
• If you sell a Section 179 asset prior to the full depreciation period, you will have to record any sales proceeds as taxable income.
• Many states limit the use of this federal shifting of depreciation. In addition, “Many states adjust the limits on Section 179 deductions. New Jersey, for example, limits the deduction to $25,000,” advises Ren.
• Any property used outside of the US generally doesn’t qualify for Section 179.

Section 179 vs. Bonus Depreciation

If these facts don’t work in your favor to be eligible for Section 179, Associate Partner Mike Engleman, CPA offers an alternative.

“As an alternative to Section 179 declaration, an election can be made to deduct bonus depreciation, which is currently 50% of the asset cost. For 2018 the rate is reduced to 40%. The original use of the property must begin with the taxpayer. Unlike Section 179, depreciation the taxpayer may still take advantage of bonus depreciation even if they have a net loss.”

Taking Section 179 for capital purchases can be useful, but it’s not for everyone. Using Section 179 for an immediate tax break means it’ll no longer be available for future years. Consider this as you manage your business’s tax obligation alongside your accountant and business advisor. Contact us for more guidance.

 
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.