Has your business invested in any capital assets in 2019, or are you considering adding any depreciable assets in the current year? The good news is the Section 179 depreciation deduction for business property is back for 2019 as an effective tax savings strategy. The election has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time. The even better news is that the deduction has been increased and expanded by the Tax Cuts and Jobs Act (TCJA).
Not qualified for the Sec. 179 deduction? Consider taking Sec. 168(k) 100% “bonus” depreciation deduction for qualified property. With the bonus depreciation deduction tax break provided by the TCJA, the entire cost of eligible assets placed in service in 2019 can be written off this year.
Here are the basics of the Sec. 179 deduction
The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to an overall total deduction limit.
The annual deduction allows for up to $1.02 million of qualified property to be immediately deducted for tax years beginning in 2019, subject to a phase-out rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The deduction begins to phase-out when $2.55 million of qualified property is placed in service for tax years beginning in 2019. (Note: Different rules apply to heavy SUVs.)
There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phase-out rule, and the taxable income limit).
In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.
The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.
Bonus depreciation is also an option
With bonus depreciation, businesses may deduct 100% of the cost of qualified assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before 2018, you could deduct only 50% of the cost of qualified new property.)
Generally, this break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022. After 2022, the allowable bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026.
Bonus depreciation is now allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate. Additionally, the deduction is not subject to the Sec. 179 deduction phase-out rule, or the taxable income limit.
Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it. Note – keep in mind that most state tax depreciation rules are not as generous as the federal depreciation tax write-offs.
Is it time to buy?
These favorable depreciation deductions will once again deliver tax-saving benefits to many businesses on their 2019 returns. If you have added qualified assets in 2019, or you are currently considering making business asset investments, you will need to place these assets in service by December 31 (i.e., during the entity’s fiscal year) to take advantage of either deduction. Please reach out to your Wegner CPAs tax expert to discuss if these tax saving strategies make sense for your business.