Changes to Section 179 Deductions and Bonus Depreciation
Passed on Jan. 2, the Tax Cuts and Jobs Act passed has many implications for manufacturers and small businesses, including a significant change to the deduction limit of Section 179 of the IRS tax code.
Section 179 gives taxpayers the ability to deduct the cost of some types of property as an expense when they file their income taxes. In 2017, the deduction limit was $500,000, but with the passage of the Tax Cuts and Jobs Act, that limit has been doubled to $1 million. And the deduction limit on total equipment purchases in the year has been increased to $2.5 million. Additionally, the new tax law increased the bonus depreciation for the first year from 50% to 100%.
Before the Stimulus Act in 2008, Section 179 was limited in scope with lower thresholds for deduction and on its way to being phased out. However, that first Stimulus Act, and others after it, have given the section more steam, raising the limits to help incentivize small businesses to make investments in their companies.
With the substantial increases in limits, metalcasters may consider the Section 179 deduction as they plan for investments in the next few years.
Which purchases qualify?
Purchases qualifying for the deduction include equipment, such as manufacturing machinery, tangible personal property in the business, heavy business vehicles like forklifts or typical tractor trailers, computers and off-the-shelf software, and office furniture or equipment. It includes very large machinery items attached to the building itself, like many pieces of metalcasting equipment, provided it is not a structural component of the building. HVAC installation, roofing and fire suppression investments in your metalcasting facility may also qualify.
According to the IRS, to qualify for the deduction, the property must meet the following requirements:
It must be eligible property.
It must be acquired for business use.
It must have been acquired by purchase.
It must not be property described under “What Property Does Not Qualify.”
Property that does not qualify includes land and land improvements, leased property, property used for lodging, or energy property.
How much can be deducted?
The amount of the deduction will basically be the cost of the qualifying property, up to the $1 million limit. According to the IRS, if you opt to deduct only part of the cost, you can generally depreciate the cost not deducted.
What dates affect the ability to apply for the deduction?
The total cost amount of deduction in a given year is $2.5 million. The deductions apply only to purchases made and put into service in that year. So, in order to apply for the deduction on your 2018 taxes, the purchase or purchases being deducted must have been acquired after Jan. 1 and placed in service before Dec. 31, 2018.
Who uses Section 179?
Section 179 is an incentive mainly geared toward small businesses. According to a small survey from financing company Balboa Capital, seven out of 10 small business owners planned to use Section 179 to deduct the cost of eligible business equipment purchased in 2017. The survey also revealed six out of 10 small business owners were planning to invest in new or upgraded equipment in 2018.
How does bonus depreciation fit into this?
Bonus depreciation gives taxpayers the ability to immediately deduct a percentage of the cost of a qualifying purchase. According to Section179.org, bonus depreciation typically is taken after the Section 179 deduction is taken. The new legislation is applicable retroactively starting with equipment or property purchased by Sept. 27, 2017, and placed into service by Jan. 1, 2023.
“The policy reason behind the depreciation increase is to encourage people to invest and modernize their manufacturing plants and technology and provide an immediate tax reduction that used to have to be recovered over a period of time,” said David Sites, International Tax Partner, Washington National Tax Office, during an AFS webinar in January. “You will still pay the taxes later—it’s a timing difference. But it is a great cash flow tool.”
One of the changes that will likely benefit metalcasters is what qualifies for bonus depreciation. With the new law, used equipment can now qualify for bonus depreciation, but it must the be the taxpayer’s first time using it.
How much money could be saved in 2018 with the deduction?
Several free Section 179 deduction calculators are available online, including one at Section179.org. The calculators take into account the cost of equipment, tax bracket, amount you plan to deduct with Section 179, amount you plan to deduct with the bonus depreciation, normal first year depreciation, and total first year deduction.
Does electing the deduction make sense for my business strategy?
Before making decisions on whether to elect for the Section 179 deduction, business owners are advised to confer with their accountants or a tax specialist.
Click here to see this story as it appears in the May 2018 issue of Modern Casting