Business owners know that when they purchase property for business use, such as a delivery truck or machinery for production, they can claim deductions for the purchase of that equipment as a business expense under Section 179 of the United States Internal Revenue Code, instead of the cost of the business property needing to be capitalized and depreciated. While Section 179 is typically applied to equipment, it may also be used to allow a taxpayer to deduct the cost of certain qualified real property improvements, including security, fire, and other alarm systems, roofs, and HVAC systems.
Section 179 is an optional election; if a taxpayer prefers to depreciate the property purchased, he or she may do so. If a taxpayer wants to elect to apply Section 179 to property purchased for business use, he or she must do so for the year that the equipment is first used, and the election, once made, is irrevocable with very limited exceptions.
The Section 179 election was created to help small businesses and encourage them to invest in their operations. How does the newly-enacted Tax Cuts and Jobs Act (TCJA) affect the benefit that this section of the tax code offers to business owners?
The TCJA has increased caps on Section 179 expensing of property purchased for pass-through businesses (whose profit "passes through" to the owner and is taxed along with the owner's other income). Pass-through businesses include sole proprietorships, S-corporations, and partnerships.
The Section 179 Deduction is $1,000,000 for tax year 2018, up from $500,000 in 2017. There is a threshold of $2,500,000 for all equipment purchased by the business in a year. A business that buys, finances, or leases new or used business equipment with a value under $2,500,000 in 2018 and puts that equipment into use during the year will qualify for the Section 179 deduction. Qualifying purchases include most tangible goods, including vehicles for business use, with some restrictions, and "off the shelf" software. The deduction begins to phase out, dollar for dollar, after the $2,500,000 limit is reached. This relatively low threshold is why the deduction benefits primarily smaller businesses.
Prior to the enactment of the TCJA, taxpayers could deduct 50% of the cost of most new tangible property and computer software in the tax year during which those items were placed in service. This 50% figure, referred to as "bonus depreciation," had been set to reduce to 40% in 2018 and 2019, then to 0% in 2020 and beyond.
Now, with the new law in place, property that is acquired after September 27, 2017 and placed in service after that date, the 50% bonus depreciation amount is raised to 100%. What's more, this property that is eligible for bonus depreciation can be used as well as new. This 100% amount will not be phased down on the schedule described above. Instead, for property placed in service between September 27, 2017 and the end of 2022, the 100% amount will apply. Thereafter, the bonus depreciation amount will be 80% for property placed in service during 2023, 60% for 2024, 40% for 2025, 20% for 2026, and 0% for 2027 and thereafter.
The bottom line is that that this is positive news for small and mid-sized businesses that want to invest in their business operations. To learn more about how best to use these new tax provisions to the advantage of your business, contact your business planning or tax attorney.
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