Section 179 Expensing: Have The Guidelines Changed This Year?
Editor’s Note: Are you a small business owner wondering how tax reform has impacted your taxes – specifically with Section 179 deductions? Section 179 deductions are one of the many areas tax reform legislation impacts. Learn more about what it is and how it’s changed here!
What Is Section 179 Qualifying Property?
All businesses need equipment: be it technology, office furniture, supplies, vehicles, machinery, or other tangible items.
Your business could purchase any number of these items throughout the year and will do so repeatedly.
Ordinarily, the cost of business equipment is capitalized and depreciated over a set number of years. Congress established Section 179 to allow eligible businesses to write off the costs in the year the qualifying items are purchased and placed in service.
Who Qualifies for Section 179?
All business types are generally eligible for Section 179 expensing, including sole proprietorships, partnerships, and corporations. Section 179 was enacted to allow eligible businesses to immediately deduct the cost of qualifying purchases.
In fact, most types of business equipment – that your business purchases and places in service during the tax year – could qualify for the Section 179 deduction. However, the total amount a business owner can deduct under Section 179 is subject to a dollar limit and a business income limit described in this article, each of which apply to the individual owner, not to the business entity.
What Qualifies for the Deduction?
Tangible personal property purchased for business use generally qualifies for the Section 179 deduction. Items could include:
- Equipment and machinery
- Business vehicles (but the deduction may be limited – see below)
- Off-the-shelf computer software
- Office furniture and equipment
- Costs of certain improvements to business buildings
- Certain agricultural and storage structures
Has Tax Reform Changed Section 179 Rules?
Yes, tax reform has modified some of the provisions of 179 expensing.
- The maximum section 179 deduction increased from $500,000 to $1 million in 2018 and the beginning phaseout of the deduction increased from $2 million to $2.5 million. These amounts will be adjusted for inflation.
- More types of building improvements are now allowed for the deduction.
- The deduction is allowed for certain tangible personal property used to furnish lodging, such as furniture and appliances purchased for a furnished rental apartment.
What are the Minimums and Maximums for Section 179 Deductions?
As explained above, the maximum Section 179 expense deduction is $1 million. It’s reduced dollar-for-dollar for qualified expenditures more than $2.5 million. For example, the section 179 deduction for a business making qualifying purchases of $2.6 million would be $900,000 [($1 million – ($2.6 million – $2.5 million)].
The deduction is limited to the amount of taxable income from an active trade or business. Any unused deduction may be carried over for an unlimited number of years.
The deduction is pro-rated if business use is less than 100%; and is not allowed if business use is less than 50%.
Vehicle expense deductions, including the section 179 deduction, have separate limitations for the maximum amount of depreciation you can take. The overall limitation is based on these factors:
- If the vehicle is a car, truck, or a van
- If it’s an electric vehicle
- If you have chosen to take special or bonus depreciation
- If the vehicle is an SUV with gross vehicle weight over 6,000 pounds but less than 14,000 pounds
- If the vehicle is bought or leased
After the first year, the balance of the vehicle’s cost is depreciate following specific guidelines.
How Can You Claim a Section 179 Deduction?
- Purchase qualified property and start using it during the tax year.
- Connect with a tax advisor. Bring financial records of each purchase, including the date of purchase, date you began using the property, and associated costs of the purchase. Your tax advisor will identify all qualifying property.
- If advantageous, your advisor will complete your return with the section 179 election.
Confused as to how tax reform will impact your upcoming tax return? The Tax Cuts and Jobs Act includes hundreds of changes to the tax law, including the healthcare penalty.