December 5th, 2017

2017 Updates: How a Section 179 Tax Deduction Can Offset Your Next Big Purchase

The Section 179 deduction has long been a valued friend to small and mid-sized business. There have been some updates in 2017, including raising the deduction limit to $510,000. Read on for updates and more details on Section 179, including how you can make the most of it.

Note that we are not accountants. Information cited here comes from other financial services firms, including two audio interviews with accountants. Please be sure to consult with your own accounting or tax team on any of this information, including how you can take action.

2017 Updates: 

The deduction limit increased to $510,000.

The purchase limit increased from $2,010,000 in 2016 to $2,030,000 in 2017. 

Pending tax reform could change the landscape of Section 179.  Stay tuned!

Updates courtesy of Lance Campbell of Hawkins Ash CPAs.

How does Section 179 Work?

Section 179 is a tax deduction from the IRS tax code that allows you to deduct the full purchase price of qualifying equipment, either purchased or financed, during the tax year.

The goal of Section 179 is to stimulate the economy. In theory, that’s the purpose behind all tax breaks, right? In the past, you’d purchase equipment and then write off the expense through depreciation over the years.

As Section179.org notes, “While it’s true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase for the year they buy it.”

Obviously, it’s designed to get businesses to invest in themselves, and it’s been used by many companies to beef up their infrastructure.

What are the Deduction Limitations?

Companies can expense up to a $510,000 deduction on new or used equipment. You can write off $510,000 for 2017, and the Section 179 maximum equipment purchase limit is $2,030,000 before a dollar-for-dollar phase-out begins.

Here’s a nice overview video courtesy of Mark J. Kohler, CPA. This video was created when Section 179 was made permanent, but it still provides a good overview.  Not all the numbers are current. 

 

Bonus Depreciation

The Bonus Depreciation works in conjunction with the Section 179 deduction. You can take your deduction right off the top, then go back and take depreciation off of what’s left.  The specifics include:

  • Additional deductions may be available if you qualify for bonus depreciation
  • Take an additional write-off of 50% of the underappreciated balance of capital expenditures and depreciable property (new equipment only)
  • Equipment must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less

Mark Kohler breaks down how Bonus Depreciation works and how it’s affected by the recent Section 179 changes in this audio interview:

QA Interview - Mark Kohler (1)

 

Section 179 Calculator

Obviously you’ll want your tax advisor to weed through all the details, and true to the tax code, there are many. For a head-spinning trip down CPA lane, take a look at the IRS’s publication on the Section 179 deduction.

You can get a strategic sense of the dramatic impact of the deduction, however, when you plug it in to the Section 179 tax calculator, provided by US Bank.

Here’s an example of the 2017 Section 179 in action, courtesy of www.crestcapital.com

Section 179 example

Note that your company has to be profitable to take advantage of the tax deduction.  

Eligible Deductions

Again, you can check through the IRS publication, but here, Section 179.org did a nice job of summarizing the eligible deductions. Here are the Section 179 new or used eligible items:

  • Equipment (machines, etc.) purchased for business use
  • Tangible personal property used in business
  • Business Vehicles with a gross vehicle weight in excess of 6,000 lbs (Section 179 Vehicle Deductions)
  • Computers
  • Computer “Off-the-Shelf” Software
  • Office Furniture
  • Office Equipment
  • Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)

Partial Business Use (equipment that is purchased for business use and personal use: generally, your deduction will be based on the percentage of time you use the equipment for business purposes).

How Can You Combine the Section 179 Deduction With Equipment Financing?

Speak with your financial lender about structuring an equipment lease or equipment finance agreement that fits best for your business.

According to Justin Forbrook of U.S. Bank, “The amount you deduct will almost always exceed your cash outlay for the year when you combine (i) a properly structured Equipment Lease or Equipment Finance Agreement with (ii) a full Section 179 deduction. It is a bottom-line enhancing tool (plus, you get the new equipment and software you’re adding to your business).”

How Do You Elect the Section 179 Deduction?

This post is designed to give you a high-level understanding of how Section 179 works for manufacturers in particular. Your accounting and tax team will weed through the filing details, but essentially you’ll want to:

Download the IRS form 4562 for the current tax year (this is 2016 form – we’ll update it as soon as the new one comes out).

Download instructions for IRS form 4562.

You’ll also want to ensure that your deduction matches the qualifying property, software and equipment. All the glorious details are laid out on the IRS’s Section 179 page.

What are Some Potential Pitfalls of Section 179?

There are some potential pitfalls to watch out for with Section 179, specifically in the following areas:

  • Multiple business entities – Section 179 deductions are limited
  • State tax law – Individual states have different laws regarding Section 179
  • Tax bracket – Unique planning is required
  • Cash flow – Today’s purchase can impact you down the road
  • Selling assets – A future sale could affect your taxes
  • New acquisition limits – Includes purchases over $2.5 million

Listen to Lance Campbell of Hawkins Ash CPAs in this audio interview as he breaks down the potential pitfalls.

QA Interview - Lance Campbell

 

How Can You Plan for the Section 179 Deduction?

Section 179 used to be renewed annually by Congress, but it is now permanent. 

“If acquiring new equipment is required to grow your business and make it run more efficiently, Section 179 is extremely beneficial, and now you can plug this right in to your financial planning,” said Laura Gustafson of Delta ModTech.

DeltaModTech Gustafson Pullquote

 

Laura, who has been working with clients for years in utilizing Section 179, notes that past frustrations were eliminated with the permanent status of the deduction, which occurred in 2015.

“You had a pretty good idea that Section 179 was going to be renewed annually, but it wasn’t confirmed until Congress actually acted on it,” she said.  “Now you can budget for equipment purchases with greater certainty and confidence.”

Also, listen to Lance’s interview for more details on planning, but here are some of the top items to keep in mind:

Don’t just buy things for the current year so you can maximize the deduction. Manage your purchases to plan for future years, especially if you plan on some big years down the road.

Maximize your taxable income brackets so you don’t waste deductions.

Take Section 179 on assets that are 7-years. On assets that have shorter life, you will have a quicker deduction.

Plan ahead. Meet with your CPA to plan out taxable income.

Other Section 179 Questions

Lance Campbell of Hawkins Ash CPAs filled us in on the some of the following terms:

What is Section 179 Depreciation Recapture?

After you take depreciation on an asset and later sell it, you have to claim income on the amount you sold the item for and “recapture” the income on the depreciation you have taken. For example, you purchase an asset for $5,000 and deduct the $5,000 (basis is zero) either by Section 179 or normal depreciation over the course of its life. Years later, you sell the item for $3,000. You have to claim $3,000 of income. This is called depreciation recapture.

What is Section 179 Carryover?

If you take a Section 179 deduction in excess of your taxable income, you are able to carry that amount over to the next year. For example: You take $50,000 of Section 179, but only have $20,000 of taxable income before the deduction. The $30,000 is carried forward to the next tax year.

What is a Section 179 Amended Return?

You go back to a prior year – 2014, for example – and amend the return to change the amount of Section 179 that was taken of the return.

What is a Section 179 Passthrough?

When a Section 179 deduction is personally allocated to you from an S-Corp or partnership. The income and expense is “passthrough” to you, and you claim in on your individual return.

Can I use Section 179 for Used Equipment?

Yes, but you can’t use Bonus Depreciation.

Please bookmark or link to this page, as we’ll update this information on an annual basis with any changes regarding Section 179.

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