If you buy or finance equipment for your business, you’ll want to be familiar with this part of the U.S. Internal Revenue Code because it could save your business money on important business equipment acquisitions.
Previously, when you’d buy business equipment, the tax code would require you to write it off incrementally through depreciation, sometimes taking several years to recoup the entire cost of the purchase. However, you can imagine that you might make different business decisions if you could see a benefit faster, in the same year you purchased the equipment. That’s the goal of recent changes – to provide more incentive for small businesses to purchase needed equipment immediately.
Section 179 is an expense deduction for business equipment like machinery, computers, office equipment, and more, allowing qualifying businesses to deduct the cost of certain equipment as an expense instead of capitalizing it and depreciating it over a period of years. I’m not an accountant, but with First Business Bank, we have a team of experienced equipment financing specialists that help business people navigate equipment purchases every day. These examples reflect the top benefits we see for many businesses, but make sure to consult an accountant before assuming your business will benefit, as well.
With the Tax Cuts & Jobs Act which became effective for tax year 2018, the limits in Section 179 changed dramatically to spur small business growth, and bonus depreciation changed as well. For Section 179, the deductible amount increased from $510,000 to $1,000,000 with a spending max of $2,500,000. As long as the total amount of the new or used equipment doesn’t exceed $2,500,000, you can deduct up to $1,000,000 of it as an expense each year (by December 31st of that year).
As an example, on a $2,000,000 equipment purchase, your business can write off $1,000,000 as an expense through Section 179, and take 100 percent of the rest ($1,000,000) in bonus first-year depreciation for a deduction of $2,000,000 total. For comparison, in 2017, you were only allowed 50 percent on new equipment only in bonus first-year depreciation.
Optimize operating costs
Through careful tax planning, and a personalized combination of Section 179 and bonus depreciation, you can strategically benefit your business in the long run. For instance, although Section 179 won’t allow you to create a net operating loss for your business, bonus depreciation does allow it. If you go this route, you can revisit years when you showed a profit and potentially claim a refund.
Start planning your company’s growth by reaching out to our seasoned experts to learn more about Section 179 tax advantages and how they can benefit your specific company.