In late 2017, the Tax Cuts and Jobs Act was signed into law, bringing sweeping tax reform including tax breaks to American businesses and individuals at the beginning of 2018. One key change for small to medium-sized businesses, is the new rules for expense and depreciation. Specifically, we’ll explore the changes in section 179 deductions, bonus depreciation, and cost segregation.
What is Section 179?
Section 179 of the new tax code that allows businesses to claim large purchases as an expense and deduct 100 percent of the value in the same year the item was purchased. This rule applies to leased and financed items also, making it easy to greatly offset the total cost of acquisition for large items. Section 179 permits businesses to fully deduct equipment, vehicles, and certain property construction and remodeling costs among other things, making this especially useful for property investors, retail, and restaurant businesses.
What is Cost Segregation?
Cost segregation is a method of determining which parts of a new construction, purchase, or remodel are eligible to claim as an expense under section 179.
For real property, the tax code requires separation between land improvements and personal property. Before the new code went into effect, new construction and acquisitions was depreciated over a 27.5- or 39-year time frame for residential and commercial property respectively. With the new laws however, companies can now expense some of those costs in the same year through section 179, plus take bonus depreciation over 5,7, or 15 years instead.
As an example, real estate investors generally deduct the cost of a building for up to 39 years, but other improvements qualify for shorter depreciation time frames. Paint or wallpaper, floor covering, lighting and landscaping are examples of portions of the project that qualify for 5, 7, or 15-year depreciation schedules instead.
Getting a full cost segregation analysis will identify these items for your company, and help you experience the full benefit of these tax code changes.
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What is Bonus Depreciation?
Bonus depreciation allows you to increase the current year depreciation deduction above the section 179 deduction.
In previous years, businesses could only depreciate 50% of qualified property, and the bonus depreciation was only allowed for new property. With the Tax Cuts and Jobs Act of 2017, the bonus depreciation now allows 100% depreciation in the first year, for both new and used property that was placed into service from September 28, 2017 to December 31, 2022.
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Who is it For?
These changes to the tax code were designed to create an incentive for small and medium sized businesses to invest in themselves. By purchasing much needed equipment now instead of at some point in the future, businesses can grow more quickly, hire more employees, and effectively create a ripple effect that stimulates the American economy as a whole.
To prevent these incentives from being abused, limitations in the form of spending caps were put into place that ensured section 179 could not be used by large corporations.
How Much Can I Deduct?
Under section 179, businesses are allowed to expense up to $1M of qualified purchases on their 2019 tax returns. Previously the maximum allowed was $520,000. There is a spending cap of $2.5 million on equipment purchases.
The total deduction under section 179 cannot be more than the declared business income for the year. Once you have maxed out the allowed deductions under section 179, you can then claim the bonus deduction.
If you’d like to learn more about tax laws and your business, we at Akif CPA are here to help. Do you have unique issues or concerns not discussed in this blog? Then please contact us by email or phone. We are here to help.
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