Depreciation – Making the most of Section 179 and Bonus
Should you purchase new assets for your business and take the Section 179 deduction?
There is an incentive created by the U.S. government to encourage businesses to invest in themselves through the purchase of eligible assets. Section 179 of the IRS code allows businesses to purchase both new and used eligible assets and deduct the full purchase price from gross income in the year of purchase (versus taking the deduction a little at a time over years). Eligible assets for example include tangible personal property (except buildings and structural components) and certain qualified real property. There are some limitations that businesses need to be aware of. The maximum amount that can be deducted in 2017 is $510,000. If a business purchases more than $2,030,000 in qualifying assets, then they are subject to a dollar for dollar phase out. Therefore, once spending reaches $2,540,000 there would be no Section 179 deduction allowed. Section 179 can only be deducted against taxable income. If you have more Section 179 deduction than taxable income, then the excess Section 179 will be carried over to the next year.
Are you eligible for bonus depreciation?
Bonus depreciation is another way for businesses to purchase assets that results in significant tax relief. Bonus depreciation can only be taken on new assets. It is generally taken after the Section 179 deduction is maxed out (at $510,000 in 2017). Bonus depreciation allows businesses of all sizes to depreciate 50% of the cost of the acquired eligible assets that are placed in service during 2017. In 2018 this will be reduced to 40%, and in 2019 to 30%. There is no cap on the bonus depreciation deduction, and there are no phase outs.
Are you maximizing depreciation on your real estate properties?
When purchasing or constructing a new property, the normal depreciation period is 27.5 years for residential and 39 years for commercial. A cost segregation study will identify certain assets as personal property and land improvements that have shorter depreciation lives (5, 7 and 15 years), thus reducing current tax obligations. Flooring, fixtures, sidewalks, fences are some examples of these type of assets. Not only will these assets have shorter depreciation lives, but some will even qualify for bonus depreciation. The PATH ACT of 2015 made qualified real property costs incurred for commercial property only, eligible for Section 179 expensing. Certain interior building costs, qualified restaurant and qualified retail costs can qualify however there are restrictions. Residential property is not eligible for Section 179 expensing.
Are you taking full advantage of your state depreciation expense?
Some US states don’t conform to the IRS limits and regulations on Section 179 deductions and bonus depreciation. It is important to know how each state treats these deductions in order to maximize deductions in current and future years.
Publication 946 – How to Depreciate Property is a useful publication by the IRS that can provide more detail. https://www.irs.gov/publications/p946
If you have any questions, or would like more information, please do not hesitate to contact an Innovative CPA Group team member.