If you’re a small business owner in California, you may be able to save money on taxes due to a portion of the U.S. Tax Code called Section 179 (26 U.S. Code § 179, election to expense certain depreciable business assets). As our Sacramento small business accountants will explain in this article, Section 179 allows eligible taxpayers to deduct in full certain business expenses, or “qualifying property,” in a single tax year, rather than spreading a depreciation deduction out over the life of the property. This practice, which is known as “Section 179 expensing” or “first-year expensing,” gives small to medium-sized businesses a valuable opportunity to recover certain financial losses. With tax season in gear, now is the perfect time for California business owners to learn more about this beneficial tax strategy – especially because the recently-passed tax reforms, the Tax Cuts and Jobs Act (TCJA), significantly increases expensing limits under Section 179 in 2018.
What Types of Property Qualify for Section 179?
Personal property must meet certain criteria in order to qualify for the Section 179 deduction. These criteria are as follows:
- The property may be either new or used.
- The property must be “tangible.” In Publication 946 (2017), How to Depreciate Property, the Internal Revenue Service (IRS) defines tangible property as “any tangible property that is not real property,” including:
- Certain computer software
- Gas pumps and storage tanks
- Portable heater units and/or air conditioners
- If used for both business and personal purposes, the property must be used for business purposes more than 50% of the time (at least 51% of the time). This requirement applies specifically to the year that you purchased the equipment. For example, if you bought a printer in 2016, you must have used it for business purposes at least half of the time in 2016.
- The property must not be:
- Business inventory
- Intangible property, which includes copyrights, patents, and some types of computer software
- Permanent attachments to lands or buildings, such as swimming pools
- The property must not be a gift or an item that you inherited. Only purchases that meet the foregoing criteria are considered to be qualifying property under Section 179.
While the IRS generally excludes real property from the definition of tangible property, certain expenses related to improving your real property may qualify for first-year expensing. Types of improvements that are included in this category may include the following, depending on the situation:
- Improvements that are made to restaurants.
- Interior improvements that are made to leased commercial (nonresidential) buildings.
- Interior improvements that are made to retail spaces.
“Qualified improvement property” is defined under 26 U.S. Code § 168(e)(6)(A) as “any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.” Excluded improvements under 26 U.S. Code § 168(e)(6)(B) include:
- Enlargements of buildings.
- Improvements to escalators or elevators.
- Improvements to “the internal structural framework of the building.”
For more information about qualifying property, business owners are encouraged to review the IRS publication above, and consult with a business accountant about tax preparation services in Roseville.
Tax Benefits of Section 179 for Businesses
It’s important to emphasize that Section 179 does not technically increase deductions, but rather, allows business owners to take a larger deduction that year. Under normal circumstances, by comparison, taxpayers generally take deductions over the life of the property – which, depending on the property, could potentially mean several decades. For example, rather than deducting parts of a $5,000 business expense over a seven-year or eight-year period, the taxpayer could deduct the full cost in one year.
Note that for tax years starting in 2017, the maximum deduction under Section 179 is $510,000, an increase of $10,000 from the maximum $500,000 deduction for 2016. The deduction starts to phase out, dollar-for-dollar, once assets surpass a threshold of $2.03 million.
The deadline for Section 179 is midnight on December 31. Therefore, it may apply to qualifying property that you purchased last year, enabling you to save on your 2017 return. Likewise, if you purchase qualifying property before 12:00 A.M. on December 31, 2018, you may be able to take advantage of Section 179 on next year’s tax return.
Changes to Section 179 Under the Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act, or H.R. 1, which refers to the federal tax reforms that were signed into law last December, had two major effects on Section 179:
- The TCJA broadened the definition of qualifying property, which may now include certain pieces of depreciable tangible personal property used chiefly for furnishing a structure.
- Additionally, the TCJA raised the maximum deduction to $1 million for tax years starting in 2018. The financial threshold at which phasing out starts was raised by the TCJA to $2.5 million. For tax years after 2018, the aforementioned levels will be indexed to account for the effects of inflation.
Get Tax Help from Small Business Accountants Serving Roseville and Sacramento, CA
A single glance at the IRS publication above will immediately demonstrate how nuanced and complex Section 179 regulations can be – especially when your time is occupied by the demands of operating a business. Fortunately, there is no need to spend hours analyzing the rules and requirements for taking a Section 179 deduction. Allow the skilled and experienced tax and accounting professionals of Cook CPA Group to handle the financial analysis and tax planning for you, so that you can focus on what you do best: running a successful company.
With more than 20 years of experience assisting business owners in industries ranging from construction to agriculture, our business tax professionals can help you determine whether you qualify to use Section 179, and assist you with planning the purchase of property to take better advantage of Section 179 next year. To learn more about Section 179 for businesses in California, contact our Sacramento CPA firm online for a free consultation, or call (916) 432-2218 to get started.