Businesses rely on property and machinery for day-to-day operations. Thankfully, business owners who purchase property for business use can claim tax deductions found in IRS Section 179.
This type of tax deduction is essentially a form of depreciation. It covers the expense of buying the property and using it over a certain number of years. It helps you on federal income tax returns by deducting the value of the business investments.
Learn more about the recent changes to IRS Section 179, and how you can take advantage of this special opportunity.
IRS Section 179 Tax Deductions for Businesses
Section 179 of the IRS Code was created to make life easier for small businesses. It allows businesses to take a depreciation deduction on certain assets in one year, rather than depreciating the deductions over an extended time.
When you take a deduction on capital expenditure in its first year, you are making a “Section 179 deduction”. There is a huge benefit to taking the full deduction for the cost of the item immediately as opposed to spreading it out over the lifespan of the asset.
A great example of a Section 179 deduction is an office computer. Technology changes rapidly, so it is assumed you may only get a few years out of the device. Therefore, you will save more by claiming the deduction for the full cost of the computer in year one, as opposed to spreading it out over the next 3-5 years.
Updated Changes to IRS Section 179
The Tax Cuts and Jobs Act of 2017 is the biggest tax reform produced in Congress in decades. Among the widespread changes was an increase in Section 179 benefits. While the benefits have stayed the same (aside from being indexed for inflation), the maximum annual deduction has increased.
Effective January 1, 2018, businesses are allowed to deduct up to $1 million for qualifying business purchases of capital property, with a limit of $2.5 million. The limits for the subsequent years are indexed based on inflation.
Another change that was added to Section 179 was to allow businesses the opportunity to use the deduction for nonresidential property improvements. Building improvements are allowed on an existing structure including adding more square footage, introducing elevators or escalators, and other major construction projects.
Business Property that Qualifies for Section 179 Deductions
The IRS has two basic requirements when it comes to determining what types of business property are appropriate for the deduction:
1) The qualified property is “tangible, depreciable personal property which is acquired for use in the active conduct of a trade or business”.
2) The qualified property is purchased and put into service in the year in which you claim the deduction.
For example, it does not count if you invest in business assets, yet have them sit in a closet or garage collecting dust. The item must be used by the business in the year you claim the deduction.
Many different types of business property qualify for Section 179 deductions:
● Machinery and equipment.
● Business vehicles with a gross weight of over 6,000 lbs.
● Costs of improvements to business buildings.
● Personal property, or anything that isn’t physically attached to a building but is used by the business (i.e. furniture).
It is also worth mentioning that “listed property” qualifies for Section 179 business deductions even if it is used partially for personal purposes. In that event, the Section 179 deduction is based on the percentage of time you use the property for business purposes.
There are a few exceptions so it doesn’t hurt to speak to a tax professional for more information about qualified business property deductions under IRS Section 179.
Annual Limits on IRS Section 179 Deductions
The IRS has annual limits on the amount of Section 179 deductions. In 2018, the limits were set at $1 million on individual items for new and used equipment. The business expense maximum is $2.5 million on Section 179 equipment.
The annual limits are indexed to inflation in the years following 2018 until the new agreement terminates in 2023.
Businesses have the option of deducting the full amount within the first year of use or may deduct part of the cost of the qualifying property to depreciate its value over several years. There are advantages and disadvantages to both options.
Tax Help on Section 179 Business Property Deductions
IRS Section 179 business deductions are a fantastic way to get some tax relief and reduce tax liability. Consider contacting a tax professional today to take full advantage of Section 179 benefits.
Levy & Associates prides itself on working with countless businesses of all different sizes. We are experts with Section 179 benefits and help maximize your return as a result. Contact us for more details by visiting www.levytaxhelp.com or call 800-TAX-LEVY.