Sec. 179 expensing is a tax-advantageous method that businesses can use to deduct the entire cost of eligible new or used depreciable property. However, determining which property meets the eligibility standards is a more complicated matter. 415 Group Manager Brian Raber, CPA, takes a deeper look at this tax break.
If you purchased qualifying property by December 31, 2017, you may be able to take advantage of Section 179 expensing on your 2017 tax return. You’ll also want to keep this tax break in mind in your property purchase planning, because the Tax Cuts and Jobs Act (TCJA), signed into law this past December, significantly enhances it beginning in 2018.
2017 Sec. 179 benefits
Sec. 179 expensing allows eligible taxpayers to deduct the entire cost of qualifying new or used depreciable property and most software in Year 1, subject to various limitations. For tax years that began in 2017, the maximum Sec. 179 deduction is $510,000. The maximum deduction is phased out dollar for dollar to the extent the cost of eligible property placed in service during the tax year exceeds the phaseout threshold of $2.03 million.
Qualified real property improvement costs are also eligible for Sec. 179 expensing. This real estate break applies to:
- Certain improvements to interiors of leased nonresidential buildings,
- Certain restaurant buildings or improvements to such buildings, and
- Certain improvements to the interiors of retail buildings.
Deductions claimed for qualified real property costs count against the overall maximum for Sec. 179 expensing.
Permanent enhancements
The TCJA permanently enhances Sec. 179 expensing. Under the new law, for qualifying property placed in service in tax years beginning in 2018, the maximum Sec. 179 deduction is increased to $1 million, and the phaseout threshold is increased to $2.5 million. For later tax years, these amounts will be indexed for inflation. For purposes of determining eligibility for these higher limits, property is treated as acquired on the date on which a written binding contract for the acquisition is signed.
The new law also expands the definition of eligible property to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for Sec. 179 expensing is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Save now and save later
Many rules apply, so please contact us to learn if you qualify for this break on your 2017 return. We’d also be happy to discuss your future purchasing plans so you can reap the maximum benefits from enhanced Sec. 179 expensing and other tax law changes under the TCJA.
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This provision is important to many of the business clients we work with. Sec. 179 expensing is a 100% write-off on qualified property, and the entire deduction is available in the tax year the property is placed in service. So, this deduction can be very helpful in justifying or even planning future purchases of depreciable business property. Not only can this tax break make a big impact immediately, it can also help offset eligible large purchases in the future.
One of the biggest areas of confusion I’ve seen surrounding the Sec. 179 expensing is how much of the eligible purchase is actually deductible. Certainly, 100% of the eligible property can potentially be deducted, however, there are limits in place that could affect the total benefit you would receive from this provision. To understand how much you might be able to deduct, you need to know the difference between the maximum deduction and the phase-out threshold. For 2017, the maximum deduction is $510,000 and the phase-out threshold begins at $2.03 million. So, if a business were to acquire qualifying property of less than the phase-out threshold, they could deduct that qualified property up to the full $510,000 limit. However, if this same business acquired qualifying property of $2.54 million or more, they would be completely phased-out and so they would be ineligible for any and all Sec. 179 expensing breaks. There is also a business income limitation that could affect your ability to take the deduction. Of course, this is only an example; your specific tax situation would dictate eligibility.
We see many of our clients take advantage of this tax program, so we are well versed in Sec. 179 requirements and the potential benefits. 415 Group is able to look at your tax situation holistically, and not only determine how this program affects your business today, but also how it might affect you in the years to come.