With two months left in the year many businesses can benefit from a quick review of their balance sheets to determine what actions they should take to close out the year. If profits look good this year you might be wondering what tax write-off options could benefit you the most. Understanding how Section 179 deductions work may help you discover ways in which the investments you made in your business this year could actually help you reduce your total tax burden.
More rapid realization of tax benefits
The Tax Cuts and Jobs Act (TCJA) of 2017 made changes to Section 179 of the US tax code, allowing businesses to see more immediate tax benefits when business purchases are made. Within specified guidelines, Section 179 allows 100% expensing for business property in the same year that it is purchased and put into use by the business. Certain assets may be purchased for mixed use in both business and personal contexts. These purchases are still eligible provided they are used for business purposes at least 50% of the time but are limited by the actual percentage of business use. Items received as gifts or inheritance do not qualify.
Not all business assets purchased are included in the Section 179 deductions. Qualified items generally include machinery, equipment (including furniture), vehicles and off-the-shelf computer software. Additionally, some types of expenses related to the improvement of non-residential real property owned by the company can be included provided that the improvements were made some time after the property was first placed in service. Systems like fire protection, security alarms and HVAC are covered as well as non-structural interior improvements and building roofs if they are placed in service after December 31, 2017.
Other significant property-related expenses are not eligible, including land assets or improvements to land such as paving parking areas, or installation of swimming pools or fences. Expanding the overall footprint of your building, service to elevators or escalators and structural changes are also ineligible for the Section 179 deduction.
The maximum deduction is currently set at $1,000,000, with a phase-out threshold of $2,500,000. This means that you can deduct up to $1 million of eligible expense as long as the 179 asset purchases do not exceed $2.5 million in total. If your 179 purchases exceed $2.5 million, the dollar amount that you can deduct reduces as the overall purchase total increases.
For more details regarding Section 179 deduction eligibilities, review the IRS publication 946.
Make the most of your 2018 deductions
Section 179 does not cover all types of property nor does it address all of your options for deductions and depreciation. Once you have reached the maximum $1 million deduction allowed within Section 179, other options for offsetting your tax burden may exist. Bonus depreciation could be an option for you to address investments and expenses not covered by Section 179. Bonus depreciation can also be used in combination with Section 179 deductions for items with value in excess of the $1 million maximum set by Section 179.
Tax rules shift significantly from year to year and as your business grows the options for maximizing the profit that you retain and reinvest may change. Retaining the services of a CPA offers you the best path forward to manage both your tax bills and your business profitability. As leading financial experts, we are here to support and guide you in the best practices to enhance your business endeavors.