How Section 179 Deduction Saves a lot of Taxes!
TCJA Amends Section 179 Deduction to Higher Amounts
For small business , section 179 deduction is great !The Tax Cuts & Jobs Act has amended depreciation rule under section 179 of the Internal Revenue Code to allow the claim of $1,000,000 of depreciation from $ 5,00,000 allowed earlier.Even the bonus depreciation is now 100 percent. The TCJA has further increased the equipment purchase limits to $2.5 million.
What is IRC Section 179 ?
Section 179 deduction is basically claimed of depreciation in one year . Simply put, Internal Revenue Code allows a business person to claim 100 % of expense on certain types of capital expenditure i.e on buying assets for use in business. This is unlike other capital assets where the full depreciation is not allowed. So section 179 expense has a direct effect on lowering your business profit and consequently results in huge savings on tax payments.For example, if you buy a car for $ 50,000 for business purpose and immediately used, you can claim $ 50,000 as the deduction under section 179 by opting and attaching the form 4562 with your tax return.
Who can claim section 179 deduction?
Any business person who fulfils following condition can claim full expenditure on buying capital assets for his/her business under section 179 of US Code 26.
- The capital asset should be section 79 properties.
- This is an optional deduction. So to claim section 179 deduction, you will have opt for it by filing IRS Form 4562. that collects information on business property acquired and put into service.
What is section 179 properties?
Since section 179 deduction is allowed on only qualified assets bought and used for business, it is important to see that purchased assets fulfil both the following conditions
- Asset must be tangible and depreciable property
- The purchased asset must be used in the active conduct of a trade or business.
Most properties are eligible to be qualified asset except land and buildings which do not section 179 property.Here is a list of Qualifying Property for Section 179:
- Business equipment of all types including machinery, computers, office furniture, storage tanks, signage, and any other commercial equipment.
- Vehicles designed for commercial-use. Vehicles with 6,000+ pounds GVW (gross vehicle weight) qualify for Section 179 but are limited to a $25,000 deduction.
- Off-the-shelf software readily available for purchase by the general public with a non-exclusive license and not substantially modified. Important: websites do not qualify for section 179 deduction.
- Storage facilities and/or structures utilized for agricultural / horticultural purposes.Please note that the main buildings / plants / offices don’t qualify. Think movable structures, grain silos, and the like.
Refer IRS Publication 946.
What is the limit for deduction under section 179 for 2019?
There are two limits that have to be counted simultaneously
- Aggregate deduction of all section 179 properties are limited to
$ 2 Million$ 2.5 million now (vide TCJA). This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis.
- Maximum value of
$500,000$10,00,000 (vide TCJA ) is fixed for each individual item of property.This deduction is good on new and used equipment, as well as off-the-shelf software. To take the deduction for tax year 2019, the equipment must be financed or purchased and put into service between January 1, 2019 and the end of the day on December 31, 2019
What happens when the value is more that aforesaid limit? You will get normal depreciation above the said limits
The key point is, after TCJA,
- During tax season 2017, businesses can deduct up to $500,000, plus bonus depreciation at a rate of 50 percent of the remaining cost of the equipment.
- During 2018, businesses will be able to deduct a bonus rate of 40 percent.
- For the 2019 tax year, businesses will be able to deduct a bonus rate of 30 percent.
- Finally, the PATH Act will be phased-out during 2020, unless another tax law is passed by the federal government.
Have you seen our calculator for section 179 deduction ?
What record keeping required for section 179 deductions?
Since opting for deducting 100% of the purchase of assets counts a lot as far as lowering tour business profit, IRS will try to scrutinize your claim fulfilling all conditions. So keep following records
- Bills & invoice for all costs that have been taken to determine cost of the assets bought by you
- Bills and invoice must reflect date of purchase
- Documentation related to delivery of goods
- Evidence of using it during the year
Consult IRS Publication 946: Depreciation for more on section 179 deduction