Section 179 Deduction & Bonus Depreciation Tax Planning

Posted On: Sunday, November 12, 2017

This is the time of year when we start to hear from business owners looking to discuss strategies that will reduce their annual taxable income. The options discussed often include the Section 179 deduction and Bonus Depreciation, which are powerful tax planning tools that can result in significant tax savings for businesses acquiring capital assets.

The Section 179 Deduction

Section 179 of the tax code enables businesses to deduct the entire purchase price of qualifying equipment and software that has been either bought or leased during the year. That means if you either purchase or finance qualifying capital assets, you can deduct the full purchase price from your gross income in the same year. This differs from regular depreciation, where the purchase price of a capital asset is slowly expensed over a period that typically ranges from three to seven years. A deduction today is always worth more than a deduction in the future!

Most types of business equipment that are either purchased or financed are eligible for the Section 179 deduction and include:

  • Business vehicles with a gross weight of over 6,000lbs
  • Computers
  • Equipment purchased for business use
  • Office equipment
  • Office furniture
  • Off-the-shelf software
  • Partial business use – equipment purchased for use in business at least 50% of the time
  • Property attached to the building that is not a structural component of the building
  • Tangible personal property used in business

The Section 179 deduction applies to both new and used equipment that has been purchased or financed and placed into service between January 1 and December 31 of the current tax year.

The 2017 Section 179 depreciation deduction limit is $500,000 and is reduced, on a dollar for dollar basis, for total qualifying capital expenditures in excess of $2 million. That means if you have $1 million in qualifying expenditures, you can deduct $500,000. If you have $2.4 million in qualifying expenditures, you can only deduct $100,000. If taking the full amount of the Section 179 deduction creates a loss, then the amount available under Section 179 is equal to the amount of expense that would result in your business breaking even for the year.

Bonus Depreciation

Bonus Depreciation is only available for new equipment and is typically taken once the Section 179 spending limit has been reached. The Bonus Depreciation deduction is up to 50% of qualifying expenditures in 2017. In addition, the maximum first year Bonus Depreciation for qualifying vehicles placed into service in 2017 is $8,000. Businesses that have a net loss typically opt for bonus depreciation because they can potentially carry-forward the resulting net operating loss to future years.

Both the Section 179 deduction and Bonus Depreciation can be taken in addition to normal depreciation.

Section 179 Deduction & Bonus Depreciation at Work

Let’s take a look at the effect the Section 179 deduction and Bonus Depreciation could have on a business that purchased and placed into service $600,000 of qualifying equipment during 2017.

 

Qualifying Purchases: $600,000
Section 179 Deduction $500,000
50% Bonus Depreciation $50,000
Normal Depreciation $ 10,000
(20% of remaining amount over 5 years)
Total First Year Deduction $560,000
Tax Savings $196,000

(assuming 35% tax rate)

 

To take advantage of this business deduction you need to act before the year is over! You should never purchase capital assets that are not essential to your business just to achieve tax savings. However, with proper tax planning, the timing of your necessary capital expenditures can be used to your advantage in minimizing your taxable income. If you would like more information on the Section 179 deduction and other tax planning tools, please contact us.

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