What is Section 179?
A Section 179 tax deduction is a portion of the IRS tax code that allows business owners to immediately deduct the cost of new equipment that they finance, lease or purchase. Section 179 became a permanent part of the tax law in 1958 for the purpose of stimulating investment and the economy.
Changes to the Tax Law
Changes in the tax law for 2018 included an expansion of Section 179 Depreciation. The amount that you are immediately allowed to deduct increased from $500,000 to $1,000,000. The $1,000,000 deduction is reduced, dollar for dollar, by each dollar the cost of the equipment exceeds $2,500,000. The intent of this limitation is to target use to small and medium sized businesses. The $1,000,000 and the $2,500,000 will increase each year starting in 2019 by the inflation rate. The Section 179 deduction is considered a permanent portion of the IRS tax code.
The new tax law also enhances bonus depreciation. Prior law allowed a 50% deduction of qualifying “new” assets placed into service. The new law allows a 100% deduction for all qualifying “new and used” assets placed into service between September 18, 2017 through December 31, 2022. A phase out of bonus depreciation is scheduled to take place from 2023 through 2026 as bonus depreciation is considered a temporary provision of the IRS tax code. Note that the addition of used equipment does not apply to equipment previously used by the taxpayer, it is used equipment acquired from a non-related party. Your professional tax preparer can help you determine if your assets meet the criteria as qualifying property. Below is an example of using both Section 179 and bonus depreciation.
|Section 179 deduction:||$1,000,000|
|100% bonus depreciation:||$550,000|
|Total first year deduction:||$1,550,000|
|Tax savings - 35% rate:||$542,500|
As the above example illustrates, the use of Section 179 and bonus depreciation allows the business owner to fully expense asset purchases in the year of purchase. It is a useful tax planning tool. When you lease an asset, you can deduct the entire amount the first year to receive the tax benefits and pay for use of the asset over the life of the lease. When experiencing a high income year, you can invest in your business and offset the taxable income with the increased deduction.
Decisions on Section 179 deductions can be made on an item by item basis. You can pick and choose. Bonus depreciation decisions must be taken for all assets with the same useful tax life. For example, if you acquired several assets that have a useful tax life of seven years, if you take bonus on one of these items, you have to claim bonus on all of them. We are not tax advisors, be sure to consult with your tax expert as each individual situation is different.
Bruce Eckhardt is the Controller for Amur Equipment Finance and oversees the financial accounting team, audit and tax for the company. Bruce came to Amur Equipment Finance from the public accounting world and is a licensed CPA.