Section 179 is a great tax tool for businesses of all sizes. If you’ve been looking at potential new purchases like computers, furniture, equipment, software, and non-structural property, make them now. Like many other tax tools this year, the race is on to max out this valuable deduction by December 31. On January 1, the value of Section 179 will likely remain but its future is unclear.
How Section 179 Works
While it can be complicated, essentially Section 179 allows a business to fully deduct qualified new or used equipment from gross income. The current deduction limit is $510,000 and the cap on purchases is $2,030,000. Larger businesses can take the Section 179 deduction too, but because the spending limit is less than what they would usually spend on new equipment, this is generally seen as a small business tax incentive.
Without the Section 179 deduction, equipment purchases must be depreciated over time – a pre-determined length of time according to the type of equipment (confirm). Instead of depreciating the cost of new equipment over time, a business can deduct the entire equipment price in the year it was bought and placed into service. This is an immediate and substantial benefit that is about to expire.
Frequently Asked Questions
What qualifies for Section 179?
Tangible goods, such as office equipment, computers, software, machinery, office furniture, business vehicles greater than 6,000 pounds, tangible personal property used in business, and non-structural property attached to your building.
Can I finance a new purchase and still qualify?
Yes, you can still qualify for Section 179 if you finance new equipment and make payments over time. You must place the equipment into service before December 31 to qualify, so even if you order something and pay for it this year, if it isn’t delivered until January 2, you cannot claim the Section 179 deduction.
Can I purchase used equipment?
Yes, you can purchase or finance used equipment and still qualify for Section 179. However, bonus depreciation only applies to new equipment.
How is leased equipment treated?
You can still claim the deduction for leased equipment, if it is placed into service by December 31. This can be very effective, because the amount of the deduction may be equal to or greater than your lease payments for the year.
What if I don’t use the equipment for my business all the time?
If the equipment you purchase is used for the business more than 50 percent of the time, you can still qualify for Section 179. Multiply the equipment cost by the percentage of business use to find out how much of the deduction you’re eligible to take.
Can I still claim Section 179 for rental property?
No. Any income-producing property, like rental or investment, is ineligible for Section 179.
Are there limits?
Yes. The maximum allowable purchase price is $2,030,000 but begins to phase out at $2 million. The maximum write-off amount is $510,000 in 2017. These limits may increase in 2018.
Bonus Depreciation
On top of Section 179, for a limited time you can also claim a 50 percent bonus depreciation on new equipment. This is especially beneficially for larger businesses that spend more than the $2,030,000 cap on Section 179 purchases.
When used in conjunction with Section 179, bonus depreciation is taken after Section 179. The exception is if the business had no taxable profit, because the business would carry the loss forward.
In 2018, the bonus depreciation deduction is reduced to 40 percent, then 30 percent in 2019 and 2020, then it disappears completely.
What’s Next?
Curious how much of a deduction you can receive? Use this handy calculator to find out how much you can save.
Under the proposed tax reform, Section 179 purchase price limits would increase to $5 million, with a higher phaseout. This change would sunset in five years, if passed.
Even if there is a higher limit in 2018, it still may make sense to accelerate some business purchases now to fully deduct them this year. Regardless of an increase in Section 179 in future years (if it happens), 2017 is the last year for 50 percent bonus deprecation, which is a valuable addition to your small business tax planning strategy.
Questions on Section 179 or bonus depreciation? The Tax Professionals at Naden/Lean are here to help.