With the passage of the Tax Cuts and Jobs Act (TCJA), business owners have new decisions to make regarding tax deductions in 2018.
The Act made significant changes to the Bonus Depreciation limit, now set at 100% through the end of 2022. Combined with an increase in the Section 179 expensing limit, these deductions are a great benefit to small and mid-sized businesses, and far more beneficial to most taxpayers than the rules in existence before the Act.
Read on for an overview of both deductions and how they could save you money during this tax year.
Internal Revenue Code Section 179 allows businesses to expense the full purchase price of qualifying equipment and/or software purchased during the tax year. When you buy a piece of qualifying equipment, you may be able to deduct the full purchase price on your business income tax return.
Before the TCJA, the government capped business taxpayers’ Section 179 deduction at $500,000, with a phase-out beginning at $2 million. The new Act raised the deduction limit to $1 million and the phase-out threshold to $2.5 million. This increases Section 179 benefits for small and mid-size businesses who spend less than $3.5 million per year for equipment.
Bonus Depreciation, according to the Internal Revenue Service (IRS), allows business taxpayers to deduct additional depreciation for the cost of qualifying business property, beyond normal depreciation allowances. It’s intended to spur capital purchases by all business taxpayers, small, mid-sized and large.
Before the TCJA, the IRS limited Bonus Depreciation to new equipment. The new law now allows for depreciation on used equipment, though it must be “first use” by the purchasing business. The new rules increase Bonus Depreciation to 100 percent for all qualified purchases made between September 27, 2017 and January 1, 2023. Bonus Depreciation then ramps down starting in 2023.
While each deduction can help businesses deduct purchasing costs for their property, combining them can offer the greatest possible benefits. IRS rules require that most businesses apply Section 179 first, followed by bonus depreciation.
Here’s why you might consider using both deductions after the passage of the TCJA:
Limited circumstances for stand-alone 179 benefits.
The increased Section 179 expense limit, along with the $2,500,000 phase-out threshold, are now permanent parts of the tax code. However, since Bonus Deprecation now covers new and used equipment, the benefits of Section 179 by themselves would only apply to taxpayers with specific business circumstances.
Short-term consistency with the bonus depreciation limit.
With the Bonus Depreciation limit changed to 100 percent through 2022, businesses now have greater incentive to make near-term purchases. Before the TCJA, was passed, the bonus depreciation limit varied from year to year.
Expands qualifying equipment beyond physical hardware.
The new rules include software, which may mean they can now benefit companies that aren’t necessarily purchasing heavy equipment.
If you’re wondering how Section 179 and bonus depreciation could affect your business tax deductions, check out the calculator below.
If you’re wondering about how these deductions could affect your equipment financing strategy, we can help. Contact your Equipment Finance relationship manager at email@example.com.