Posted:
6/13/2018
William G. Lako, Jr., CFP®
Shawna L. Theriault, CFP®, C.P.A.
With the signing of The Tax Cuts and Jobs Act, the deduction limit for Section 179 doubles to $1,000,000 for property placed into service after Dec. 31, 2017. For businesses, this is a robust benefit that is likely to stimulate additional growth, as it provides an immediate tax benefit for businesses that purchase anywhere from $1 to $2,500,000 worth of equipment.
Section 179 is intended to help small to medium businesses, allowing them to plan their purchases and growth. While Section 179 was made permanent in late 2015, Congress increased the threshold limits and expanded the definition of property to include certain depreciable tangible personal property.
Let’s say your business needs to upgrade its computers and servers to the tune of $600,000. Provided the equipment is purchased during 2018 and placed into service, you are now able to deduct the entire expense in the first year from income taxes instead of depreciating the machines over several years.
The full deduction can be claimed until you reach $2,500,000 in purchased equipment. For purchases above that threshold, the deduction decreases on a dollar-for-dollar basis until it disappears entirely at $3,500,000 of purchased equipment. You cannot use Section 179 expensing to deduct more in one year than your net taxable business income, which is your gross business income for the year, less your business deductions, but not including the Section 179 deduction, self-employment tax, or any net operating losses. Any excess 179 expense limited by taxable income is carried forward.
The Tax Cuts and Jobs Act also increased bonus depreciation to 100% and made it retroactive to Sept. 27, 2017, and it also now includes used qualified property. Previously, taxpayers used bonus depreciation for new qualified property and Section 179 for used qualified property. Generally, businesses are required to spread out the cost of long-term assets through depreciation. Bonus depreciation was an additional incentive Congress provided to businesses to encourage them to purchase capital assets. Furthermore, bonus depreciation is not limited to taxable income and can generate a loss. Companies with a net loss for the tax year can qualify to carry-forward bonus depreciation to a future year.
The 100% bonus depreciation is scheduled to phase out after five years. Beginning in 2023, the immediate first-year expensing will be reduced to 80%, followed by 60% in 2024, 40% in 2025, 20% in 2026, and reduced to 0% thereafter, unless Congress enacts more change.
Bonus depreciation generally should be taken on the adjusted basis of the cost of the property after any Section 179 expensing. Let’s say your business purchases $1.75 million in new equipment in 2018. You can write off $1,000,000 in the first year with Section 179. You can also write off $750,000 as bonus first year depreciation. If your company is in the 35% tax bracket (ignoring state taxes), that is a tax savings of $612,500, thus reducing the potential cost of your equipment to $1,137,500. If you finance or lease the equipment, your year one out-of-pocket cost would be the net benefit from tax savings.
Company vehicles generally had restrictions when it came to Section 179 and bonus depreciation. With the Tax Cuts and Jobs Act, the maximum amount of depreciation for passenger autos—for which bonus depreciation is not claimed—was more than tripled to $10,000 in the first year, $16,000 in the second year, $9,600 in the third year and $5,740 in the fourth and later years.
It is often better to take a deduction today rather than smaller deductions spread over five years. By minimizing taxes now, a business can maximize cash flow needed for operations. This can be particularly valuable to start-ups and growing businesses.
William G. Lako, Jr., CFP®, serves as a principal at Henssler Financial. Shawna L. Theriault, CFP®, C.P.A. is a Managing Associate at Henssler Financial, specializing in assisting high net worth individuals, families and businesses in tax, financial and estate planning. Both Lako and Theriault are Certified Financial Planner™ professionals. Founded in 1987 by Gene W. Henssler, Ph.D., Henssler Financial provides solutions for individual, corporate and institutional clients that incorporate a range of services, including wealth management, financial planning, tax preparation and consulting, small-business retirement planning and estate planning. www.henssler.com
