How Does Section 179 Apply to your Business?
(OnFocus) If a business could write off the entire purchase price of qualifying equipment for the current tax year, it potentially could save the business significantly on taxes and help the business to grow.
Section 179 of the IRS tax code allows just that—businesses can deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.
This means that if a business buys a piece of qualifying equipment, the business can deduct the full purchase price from its gross income.
“Section 179 of the tax code allows taxpayers who are participating in an active trade or business to immediately expense tangible personal property purchased during the year,” explained Matt Eckelberg, partner in the Marshfield office of Hawkins Ash CPAs. “Tangible personal property is any item purchased for use in a business that is expected to last longer than the next 12-month period and not classified as real estate.”
Examples of tangible personal property are office furniture, computers, vehicles, equipment and machinery. The expensing election is made annually and is specific to each asset purchased.
“If a business was to purchase equipment during the year totaling $250,000, it could potentially deduct the full $250,000 in the current year versus taking the deduction expense over a period of years,” explained Eckelberg. “The business could select to expense any amount from $1 to the full amount of the purchase.”
In order to qualify for taking the expensing election, a business must meet certain criteria laid out in the code. Effective for tax years beginning Jan. 1, 2018, businesses immediately can deduct up to $1 million for qualifying purchases of capital property. After 2018, the limits are indexed to inflation.
According to Eckelberg, for the 2019 tax year, the deduction limits are unchanged. The deduction is reduced dollar for dollar for any acquisitions more than $2,500,000 and is completely phased out at $3,500,000 of purchases. The new assets must be used more than fifty percent of the time in the business in order to qualify.
“Also, Section 179 is limited for certain vehicles and software purchases,” he said. “Finally, the deduction for Section 179 expensing is limited to the income of the business in the year the election is made.”
It is important to note that Section 179 is a separate provision from bonus depreciation.
“Unlike Section 179, bonus depreciation is not limited by the business’ income, affects all assets in a class of assets and must actively be elected out if you do not want to take it,” said Eckelberg. “Both are effective tax reduction strategies. Section 179 is like using a small brush to paint small distinct areas, while bonus depreciation is more like using a wide brush that covers a large area in one swipe.”
Section 179 is an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves. Hawkins Ash CPAs can help business owners understand and apply Section 179.
“We are able to assist in the determination of how much deduction is available to the business and how best to use the deduction in conjunction with bonus depreciation. We would have a discussion with the business owner regarding any planned future purchases and projected income for the upcoming year to help determine how much of the potential deduction should be used.”
Once the decision on the amount of election to use is made, Hawkins Ash CPAs can help the business maintain the depreciation schedules needed to track and calculate future depreciation.
“The benefits of expensing under Section 179 can be realized by any business. It typically is most beneficial to small and medium-sized businesses,” said Eckelberg. “The first year tax break helps to make the purchase of new items easier to cash flow with the reduced tax burden that year. Businesses in most industries can benefit from this tax provision. Some industries, such as real estate rentals, are not eligible to make the election under the current Internal Revenue Code.”
For more information, contact the Marshfield office of Hawkins Ash CPAs at 715.387.1131.