Posted by Amcad Amdin on 11/19/2020 to Financing
Improve your business’s tax position by using Section 179
You can improve your business’s tax position by using Section 179 to expense the full cost of certain assets during the year you placed them in service. Instead of depreciating costs over five years or more, you can deduct the asset’s entire cost in the year it was ready and available for use. By doing this, you are reducing your taxable income and creating tax savings.
What are the rules for Section 179 deductions?
- Eligible equipment must be new-to-you; even used equipment that is new to your business qualifies.
- Section 179 applies to tangible personal property and qualified real property. (Check with your tax professional to see if your purchases qualify.)
- The deduction limit for Section 179 is $1,040,000 for tax year 2020 and is reduced by the amount by which the cost exceeds $2,590,000.
- All assets must be placed in service by Dec. 31 of the tax year.
Once your reach your Section 179 limit, bonus depreciation kicks in and you can do a 100-percent depreciation deduction in the first year for certain property, including machinery, equipment, computers, appliances and furniture placed in service after Sept. 27, 2017, and before Jan. 1, 2023
Section 179 deduction, bonus depreciation or both?
Your business may be eligible for the Section 179 deduction, the bonus depreciation deduction or a combination of both. Here are two scenarios where we’ve simplified the “tax math,” based on the maximum deduction limits for the cost of property purchased and an assumed effective tax rate of 21%.
You’ve purchased a piece of equipment for $250,000. This amount is below $1,040,000, so you would see a savings of $52,500 using the Section 179 tax deduction, effectively making your after-tax equipment cost $197,500 or $250,000 minus $52,500.
It’s been a big year, and you’ve decided to grow your business. You spend $3 million on equipment purchases and leases. Your Section 179 deduction is $630,000, calculated by subtracting the amount that your purchase of $3 million exceeds $2,590,000 ($410,000) from the maximum deduction of $1,040,000.
You then add this to your bonus depreciation deduction.
The total property eligible for bonus depreciation (i.e. the $3 million on equipment purchases and leases) is reduced by the Section 179 claim (the $630,000), making your bonus deduction equal to $2.37 million. Assuming a 21% tax bracket, the total tax savings would be $630,000, effectively reducing the equipment cost to $2,370,000.