There are a number of significant updates to the Section 179 deduction thanks to the passage of the Tax Cuts and Jobs Act, signed in December of 2017. The expense limits have increased as well as some of the Bonus Depreciation.
Before we delve into the details, 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.
2018 UPDATES in brief:
Section 179 deduction limit increased to $1,000,000.
The maximum expense limit has been increased, and is currently in effect for fiscal year 2018.
Bonus Depreciation has increased from 50% to 100%.
Bonus Depreciation, typically used for expensing beyond the Section 179 limit, has increased to 100% through 2022.
Bonus Depreciation has been expanded to used property.
This would apply to buying old presses, for example.
The phase-out purchase limit increased to $2,500,000.
Up from the $2,030,000 in 2017, the $2,500,000 phase-out limit means that your deductions start to decrease dollar-for-dollar after you exceed the new limit.
For example, let’s say you purchased $3 million worth of equipment. You would now be $500,000 over the phase-out purchase limit, which means your deduction would decrease by $500,000.
We’ll take a more in-depth look at these deductions, but first, let’s review the Section 179 deduction and Bonus Depreciation.
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.
How does Bonus Depreciation work?
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 100% of the underappreciated balance of capital expenditures and depreciable property (new and used equipment)
- 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:
What are the Deduction Limitations?
As noted earlier, a company can expense up to a $1,000,000 deduction on new or used equipment with Section 179. This deduction is applied to a specific piece of equipment, and it allows you to take a one-time deduction.
The prior Bonus Depreciation level of 50% meant you could deduct up to 50% of the cost of the equipment. Now with the new level, you can effectively deduct 100% of the cost.
The amounts then subsequently decrease to 80% (2023), 60% (2024), 40% (2025), and 20% (2026).
This begs the question: Why use the Section 179 at all if Bonus Depreciation allows you to take a 100% deduction, without a phase-out limit? There are two main reasons.
- Single assets versus multiple assets. The difference here is that Bonus Depreciation has to be applied to all the assets that are purchased within a given asset life.
For example, if you bought 5 printers that cost $3,000 each: Printers have a class life of 5 years. If you wanted to bonus these printers, you’d have to bonus all of them. If you elected not to take the bonus on the 5 year assets, you could take the 179 deduction on individual printers.
- State tax laws. An individual state’s tax laws will have an impact on which deduction you choose. Minnesota, for example, allows a business to deduct only $25,000 of Section 179, while it allows you to deduct 20% of the federal Bonus Depreciation.
On a purchased piece of equipment that costs $25,000, the Minnesota deduction would be $25,000 using Section 179. It would only be $5,000 using Bonus Depreciation.
Hawkins Ash CPAs does a nice job recapping the Section 179 changes in their post.
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.
We ran a very simple calculation on a piece of equipment valued at $1,500,000. The equipment cost after tax savings was either $975,000, or $1,185,000, based on the specific tax rates detailed below.
|Cost of Equipment||$1,500,000|
|1st Year Write-offs|
|Total 1st Year Depreciation||$1,500,000|
|Potential Tax Savings in 2018 (assuming 35% tax rate. This rate would represent the second-highest individual tax rate, and is applicable for individuals with pass-through businesses.)||$525,000|
|Potential Tax Savings in 2018 (assuming 21% new corporate tax rate)||$315,000|
Note that your company has to be profitable to take advantage of the tax deduction.
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)
- 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 (must be greater than 50%. 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.
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.
How Can You Plan for the Section 179 Deduction?
The best news about Section 179 is that the deduction is now permanent, giving your strategic team ample time to prepare for the coming year.
“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.
Laura, who has been working with clients for years in utilizing Section 179, notes that past frustrations are eliminated with the permanent status of the deduction.
“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 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 it on your individual return.
Can Section 179 be Applied to Used Equipment?
Yes, thanks to the new law.
Please bookmark or link to this page, as we’ll update this information on an annual basis with any changes regarding Section 179.