It’s a new year, and you know what that means: it’s a great time to consider planning for financial success in 2019.
You probably don’t relish thinking about tax time, but this year’s tax season could be a game changer for your business, bringing with it some new opportunities to save money. Significant alterations to Section 179 were made in the Tax Cuts and Jobs Act (TCJA) of 2017 that can lead to improved cash flow, and that means more funds available for your company.
There’s good news in the bonus depreciation allowance, too, with an increased depreciation rate that can be claimed sooner. Both these measures allow you to deduct the assets you need for business activities more quickly and for higher amounts than you could before.
It’s always a good idea to review your options thoroughly before you file taxes. You could find new opportunities for the growth of your business in the fine print. Here’s what you should know about Section 179.
Section 179 was first established in 1958, with the intention of stimulating small business investment in goods that benefit the business, simplifying accounting, and reducing the tax burden.
In order to qualify for the deduction, you must use the goods for business for a minimum of 50 percent of the time. The cost of the goods can be deducted in the tax year the goods were “placed in service”—that is, ready to be used in the business.
Under TCJA, the list of assets that are eligible for Section 179 deductions has been expanded and the maximum deduction has been increased, along with the spending threshold.
You might find differences between your local authority and the IRS when it comes to definitions of tangible personal property and real property. Remember that qualifying property for the Section 179 deduction is defined by the IRS and not controlled by local law.
The IRS provides a complete list of qualifying property in Publication 946.
Tangible Personal Property
Tangible personal property is defined by the IRS as tangible property that is not real property. Examples of tangible personal property include fixtures inside or attached to a building, such as refrigerators, office equipment, printing presses, testing equipment, and signs. Numerous improvements to the interior, roofs, heating, security, and fire protection are also acceptable Section 179 expenses.
Machinery and equipment used for manufacturing, production, or extraction, or to provide transportation, communications, electricity, gas, water, or sewage disposal services are considered tangible personal property. Research facilities needed for business activities qualify for the Section 179 deduction, and air conditioners and heaters put into service after the tax year 2015 are also eligible.
Livestock qualifies for Section 179, as well as single-purpose structures for livestock and horticulture. Facilities used in relation to distributing petroleum or primary products of petroleum are also allowed.
Another potential deduction is off-the-shelf computer software purchased and put in service from 2003 and forward
Certain property placed into service in the tax year can be treated as Section 179 property. Qualified real property includes certain leasehold improvement property, qualified restaurant property, and qualified retail property.
Generally, the property must be non-residential and meet requirements set out in the Internal Revenue Code. The IRS provides detailed information in “Special rules for qualified section 179 real property” in Publication 946.
Section 179 Limits
Section 179 is subject to two limits: an investment limitation and an income limitation.
You can deduct up to $1 million of qualified expenses per year, purchased and placed in service for your business in 2018 and following tax years. A dollar-for-dollar phaseout begins when expenses for the year exceed $2.5 million to a limit of $3,500,000—Section 179 deductions stop at that threshold amount. Both amounts are indexed to inflation.
Investment limitation amounts cannot be carried forward for future tax years.
Section 179 deductions are not allowed to exceed the taxable income of the business, including wages and salaries. The limitation is calculated after the investment limitation. For example, if the taxable income of your business is $50,000, and qualified expenses total $75,000, Section 179 deductions are limited to $50,000.
Allowances that can’t be used because of the income limitation can be carried forward indefinitely.
Bonus Depreciation Allowance
When you have exceeded the limits for Section 179, you’re able to recover capital expenses for your business over a longer period and at a slower rate, by claiming depreciation deductions under Section 168(k), referred to as bonus depreciation. A few changes have been made to this allowance, too.
The Bonus Depreciation Allowance (BDA) applies to used qualified property now, as well as new acquisitions. The depreciation limitation has also been accelerated in the TCJA to temporarily allow you to deduct 100 percent of such purchases for the same year.
The cost of goods placed into service from September 28, 2017, through to the end of 2022 is eligible. Starting in 2023, the percentage for depreciation is scheduled to decrease in increments, down to zero percent by 2027 and after.
Though both Section 179 and bonus depreciation are available in the same tax year, claims must be filed in the right order. Claim Section 179 allowances first; then you may proceed to claim bonus depreciation for the amount that remains.
By accessing deductions under Section 179 and the bonus depreciation allowance, you could potentially deduct nearly all the expenses incurred for qualified acquisitions for the tax year—as long as the deductions are claimed appropriately.
Start the Year Right
Beyond researching Section 179, there’s a lot you can do at the beginning of the year to set yourself and your business up for financial success. Stay on top of all the changes to the tax laws, key tax dates, and other essential financial tasks with this Q1 financial planning checklist.
This guest article was contributed by Irene Malatesta of Fundbox. Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.