A tip of our hat to our friends (and accountants) at Insight Accounting Group for providing business owners and financial managers with a little clarity on the new tax law changes as they apply to capital expense rules and the Section 179 deduction. You can read the full text from their May newsletter for yourself, along with past newsletters, at their site.
To briefly recap here though… Sec. 179 deductions are important investment tools for most business owners, allowing them to quickly recapture the benefits of their investments in capital equipment, including business hardware and software. Following are some changes Insight Accounting wants everyone to know about going forward.
- The new law increases the amount of business property purchases that can be expensed, from the former $500,000 to $1,000,000. Section 179 allows you to get the tax break immediately in the year the property is placed into service, rather than spreading that depreciation over several years.
- An eligibility phase-out for Section 179 ensures it’s only used by small businesses, and that phase-out has been raised from $2 million to $2.5 million. If you spend over $2.5 million on business property in the year, your ability to use the $1 million Sec. 179 deduction is reduced dollar-for-dollar above that amount. The deduction, by the way, applies to new and used equipment. And, you can now use Sec. 179 on property used to furnish lodging (rental and real estate) and for improvements to nonresidential real estate like roofs, HVAC, etc.
- Bonus depreciations limits have been improved under the new law, but for a limited time. Now, first-year bonus depreciations increases to 100% of the qualified asset purchase price for the next five tax years. This is particularly useful for assets with a 20-year or less useful life, and thus includes equipment and software. Bonus depreciation formerly applied only to new equipment, but can now be applied to used equipment as well. The depreciation starts to decline in 2022, declining by 20% per year thereafter.
- Remember finally that while the new tax law gives you expanded tools to accelerate depreciations, they’re not always your best bet; sometimes the standard tax treatments are more advantageous. The benefits have more to do with the timing of the expense, and not the amounts, so always be sure to check with your tax adviser or accountant first.
Again, our thanks to Insight Accounting Group for their guidance.