2018 Bonus Depreciation
on Capital Equipment and Section 179 of IRS Tax Code:
In years past, when your business bought qualifying equipment, it typically wrote it off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example). Now, while it’s true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it. And that’s exactly what Section 179 does – it allows your business to write off the entire purchase price of qualifying equipment for the current tax year.
This has made a big difference for many companies (and the economy in general.) Businesses have used Section 179 to purchase needed equipment right now, instead of waiting. For most small businesses, the entire cost of qualifying equipment can be written-off on the 2018 tax return (up to $1,000,000).
Limits of Section 179
Section 179 does come with limits – there are caps to the total amount written off ($1,000,000 for 2018), and limits to the total amount of the equipment purchased ($2,500,000 in 2018). The deduction begins to phase out on a dollar-fordollar basis after $2,500,000 is spent by a given business (thus, the entire deduction goes away once $3,500,000 in purchases is reached), so this makes it a true small and medium-sized business deduction.
Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2018 should qualify for the Section 179 Deduction (assuming they spend less than $3,500,000).Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2018 and December 31, 2018.
What’s the difference between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn’t. Right now in 2018, it’s being offered at 100%. The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is “new to you”), while Bonus Depreciation has only covered new equipment only until the most recent tax law passed. In a switch from recent years, the bonus depreciation now includes used equipment.
Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,500,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
Below is an example of Section 179 at work during the 2018 tax year:
2018 Section 179 Example Calculation
|First Year Write Off:
($1,000,000=Maximum in 2018)
| 100% Bonus First Year Depreciation
(Updated to 100% via Tax Cuts and Jobs Act)
|Normal First Year Depreciation
(20% in each of 5 yrs. on remaining amount)
| Total First Year Deduction:
($1,000,000 + 150,000 + 0)
| Cash Savings:
($1,150,000 x 35% tax rate)
| Equipment cost after tax:
(Assuming a 35% Tax Bracket)
|Prepared by Crest Capital|