If you need to purchase equipment for your small business this year, you may be in for a treat. Generally, you can qualify for sizeable current deductions, instead of recouping the costs through depreciation deductions over an extended period of time. Furthermore, the Tax Cuts and Jobs Act (TCJA) has enhanced these tax benefits for business owners.
- Section 179 allowance: Under Section 179 of the tax code, a business may “expense” (i.e., currently deduct) the cost of new or used business property placed in service during the year, up to a specified limit. The maximum deduction has increased in fits and starts in recent years.
Now the TCJA has doubled the maximum $500,000 allowance to $1 million, indexed for inflation. The maximum for property placed in service in 2019 is $1,020,000.
For these purposes, “qualified property” includes business assets with a cost recovery period of 20 years or less, depreciable software that is not amortized over 15 years, qualified leasehold improvements and water utility property. However be aware of a couple of limitations:
- The Section 179 deduction cannot exceed your net taxable income from your business activities. For example, if your firm generates $800,000 a year in net taxable income and acquires $900,000 of qualified business property, the deduction is limited to $800,000.
- The maximum Section 179 allowance is reduced on a dollar-for-dollar basis above a specified threshold. Under the TCJA, the threshold has been increased from $2 million to $2.5 million, subject to inflation indexing. The threshold for property placed in service in 2019 is $2,550,000.
- Bonus depreciation: To further sweeten the pot, Congress added the bonus depreciation deduction years ago, starting with a 30% deduction. The bonus depreciation deduction has also been adjusted several times. Finally, the TCJA doubled the deduction from 50% to 100%, effective for property placed in service after September 27, 2017.
In addition, the TCJA expanded the bonus depreciation deduction to qualified used property. Previously, it was restricted to new property.
However, after 2022 the 100% bonus depreciation deduction is scheduled to be phased out, as follows:
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
After 2026, bonus depreciation will no longer be available, unless Congress renews or extends this tax break.
But that is not all. If there is still any amount left over after the Section 179 and bonus depreciation deductions have been claimed, the remainder may be written off under the regular depreciation rules.
Note that your small business may elect out of bonus depreciation if it suits its needs. For instance, if a business is having a low-income year, it might choose to defer tax benefits until future years when it expects to have more taxable income to offset.
Practical advice: Consult with your professional tax advisor about your situation. With guidance, your business can maximize the available tax breaks on the books.