Small business owners who have used the Section 179 tax deduction in the past for equipment purchases are in for a pleasant surprise in 2018.
The Tax Cuts and Jobs Act that passed in 2017 made significant changes to Section 179 and first-year bonus depreciation.
Under the Act, the Section 179 annual deduction limit was raised to $1 million, effective Jan. 1, 2018. The highest annual investment limit for qualifying equipment purchases was set at $2.5 million. These limits will be indexed to inflation starting in 2019.
The old limit, $500,000 with a $2 million annual investment, was set in 2015 under the Protecting Americans from Tax Hikes Act (PATH Act).
The changes are exciting for small business owners because for many years Congress decided the Section 179 annual limit after the start of the tax year. More often than not, the annual limit wasn’t set until late in the tax year or it was made retroactive.
That created uncertainty for business owners who relied on the deduction but didn’t know the limit when planning their equipment purchases for the year.
How To Use Bonus Depreciation
Along with the changes to Section 179, bonus depreciation can be used to deduct the cost of certain qualifying long-term business property.
Under the old rules, business owners could use bonus depreciation only for new property. The Tax Cuts and Jobs Act changed the rule so that now you can use bonus depreciation for purchases of new or used property.
But unlike Section 179, there is no annual dollar limit on the amount you can deduct using bonus depreciation. You need not use the property at least 51 percent of the time for your business. However, the property must be placed in service in the year the deduction is claimed.
The Tax Cuts and Jobs Act increases first-year bonus depreciation to 100 percent. It goes into effect for any long-term assets placed in service after Sept. 27, 2017, until Jan. 1, 2023. After that, first-year bonus depreciation goes down as follows:
- 80 percent for property placed in service after Dec. 31, 2022, and before Jan. 1, 2024
- 60 percent for property placed in service after Dec. 31, 2023, and before Jan. 1, 2025
- 40 percent for property placed in service after Dec. 31, 2024, and before Jan. 1, 2026
- 20 percent for property placed in service after Dec. 31, 2025, and before Jan. 1, 2027
Consult With A Tax Professional
Understanding these changes to the Section 179 tax deduction will be abundantly useful to any small business owner planning purchases throughout the year.
Consult a tax professional to understand the new tax laws and how they might affect your business.
Key questions include what kind of equipment or software purchases could be most beneficial to your business, especially with the updated list of expenses covered by the deduction.
Review your budget and determine the best approach for financing or purchasing new equipment. Use financial modeling to estimate the tax savings resulting from each approach.
As always, think about the tax savings for your business. Review various financial strategies to optimize your savings or growth.