Should Your Business Take a Section 179 Expensing Election?

As a business owner, you’ve got to make every dollar work as effectively as possible. Part of being efficient with your funds is knowing the tax implications of large purchases before you buy. If you need new equipment, software, furniture, or even vehicles, what options do you have for deducting those purchases and how can you save the most money when you do? One such strategy is taking a Section 179 expensing election. This rule allows businesses to deduct the entire purchase price of qualifying property from their taxable income the tax year the property is placed into service.

Planning to take a Section 179 deduction could be very helpful for your business, but you should be aware of exactly what qualifies for the deduction and how it can affect your overall tax situation. Speaking with an experienced, business-minded CPA is the first step. The team at Everhart, Grant, and Associates, PA is ready to sit down with you to develop a comprehensive tax filing plan and advise you on the best ways to navigate your business taxes throughout the year.

Traditional Depreciation of Property

The standard system for depreciating property in the US tax code is known as the Modified Accelerated Cost Recovery System, or MACRS. Under MACRS, a business would deduct a portion of the cost of capitalized property in each year of what is known as the recovery period, i.e., that property’s useful life as defined by US tax law. As the property is depreciated, its book value declines in accordance with the depreciated amount each year. This change in book value is set against what is known as the depreciation schedule, and these schedules must be maintained as part of the business’s asset valuations within its balance sheet.

While there are multiple methods of depreciation under MACRS (straight line, declining balance), all of them require you to wait more than a single tax year before you can claim the entire deduction associated with the cost of the property. Additionally, the total value of depreciation (and the related tax deductions) must exclude the property’s salvage value, which is the book value the property is expected to retain at the end of its useful life.

The Benefits of Section 179 Deductions

Section 179 gives you the option to deduct all or part of the costs of property bought for use in your business the year it was purchased. This has a few immediate benefits. Firstly, it moves the entire value of the deduction to a single period, allowing you to claim a larger deduction during that tax period versus spreading the purchase over a series of smaller deductions in later years. A more significant deduction today versus smaller deductions in the future means more money back into your business right now. You can invest that money for future earnings, a concept known as the “time value of money.”

Secondly, it removes the requirement to maintain a depreciation schedule for the purchased asset, which lowers bookkeeping costs and eliminates an administrative headache. Additionally, you do not need to consider an item’s end-of-useful-life salvage value; up to the entire cost of the purchase may be deducted during that period.

Section 179 deductions are meant to help businesses more immediately offset the costs of acquiring certain types of property compared to traditional depreciation schedules. The rule serves as a mechanism to encourage companies to invest in property with the hopes that they will experience additional growth in their revenue base (and therefore increase in their taxable base).

What Assets Can You Deduct with Section 179?

If you are interested in taking a Section 179, the assets in question need to be put to use in the operation of your business. You can’t buy machinery and then let it sit in a corner. You have to be utilizing the property during the tax year in which you plan to deduct its cost. The property also needs to fit the definition of tangible and depreciable.

Starting on January 1, 2018, the Tax Cuts and Jobs Act has increased the Section 179 allowable deductions to include improvements to nonresidential real property and qualified real property (like land and buildings). Some examples of eligible property include vehicles, computer software, and even renovations like fire protection, air conditioning, ventilation, and roofing.

If you have personal property that you use for business, you may use Section 179 to deduct a portion of its cost as well. The percentage of time you use the space for business is the percentage of cost that you can deduct. A skilled CPA well-versed in these matters will be able to help you determine if your acquisition applies to Section 179.

Limits to the Section 179 Election

You cannot use Section 179 to deduct more than $1 million on a single purchase. This amount is up from $500,000 in years before 2017. All together the maximum you can deduct via Section 179 in a single year is $2.5 million, up from $2 million in previous years. For tax years 2019 and beyond, those limits are indexed to inflation. Your total deduction amount is also subject to taxable income limitations. To put it simply, you can’t deduct more from your taxes than you’ve made in taxable income.

Even if the cost of your property exceeds these limits, you still have some options. Any purchases that you’ve made above those limits can be carried over for deduction by a traditional depreciation schedule in the following years. Again, if you think you qualify for a Section 179 election and want to know precisely what the limits are for the tax year you intend to put the property to use, a business tax expert should be consulted.

How to Elect a Section 179 Deduction

Setting your business up for this type of deduction is a straightforward process. If you are making an unusually large purchase, you may want to sit down with a tax professional first to be sure the property qualifies. Then, once you’ve bought the property and put it to use, you need to keep records of the purchase date, when you began using the property, and any costs associated with setting it up for use. When tax season arrives, you elect to deduct all the qualifying expenses on IRS Form 4562.

Should You Take a Section 179 Deduction?

Now that we’ve covered a little bit about Section 179 and its benefits, you likely have a better idea if it’s the right move for your business. If you are considering purchasing property and taking a Section 179 expensing election, the tax experts at Everhart, Grant, and Associates, PA are here to help you begin the process. Our knowledgeable team has years of experience helping businesses just like yours achieve their optimal tax strategy. Contact us today to set up a free consultation!