It is never early to start thinking about the upcoming taxes and how it will affect you. Small business owners have to end up maximizing their deductions in order to minimize the taxes which they have to pay. These small business owners, however, may not be aware of a unique tax code which can be quite beneficial for them. This is section 179. As per a survey that was done by the National Federation of Independent Business or NFIB for short, almost 70% of small businesses are planning on taking advantage of this tax code. If you are a small business owner and yet unaware of section 179 and how it can affect you, then this guide will be beneficial for you. It can help you in many ways, especially to find out what are the applicable deductions which you may have.
What is Section 179?
Section 179 is basically for the deductions of business depreciation of their property. It does not increase the deduction overall, but it does provide a business with the option of taking their deductions more quickly. In many cases, the useful life of an asset can actually stretch out to over 39 years. In Section 179, the business has the option of declaring the full deduction of their asset in just one year, rather than spreading it out over many years. For example, if a business purchases a computer or any equipment to be used for their office, they have the option of deducting the entire cost of that equipment in one year, under Section 179. This makes sense – everybody knows that computers, generally, do not have a long useful life.
Section 179 can also be explained as a direct expense or a deduction which the business owners can make for their business equipment, rather than capitalizing and depreciating that asset. This form of expensing method is a form of incentive for small business owners, which can help them grow their business as they purchase new equipment or assets. New, small business owners who have to invest in a lot of assets right away can take advantage of this Section 179 deduction immediately. It also helps older, established businesses to invest or purchase new assets, which can help their companies grow. While buying new assets means a lot of investment or money spent up front, the lower burden of tax can help to ease the impact of this burden initially.
What does Section 179 mean for Small Business?
Under Section 179, the tax deduction expands to a deduction limit which is a maximum of $1,000,000, and it is at this level permanently as of now, until any further notice by the law. The point of this tax break is to encourage or provide an incentive for small business owners to be able to buy new business furniture, equipment, computers, vehicles, and other tangible capital investments. This way, a small business can deduct around $1,000,000 amount maximum each year as they qualify for business equipment purchases from their taxable income.
Section 179 is not something new. In fact, it has been around for many years, but the availability of this tax deduction and its levels are usually fluctuating. When it was introduced initially, the limit of this tax deduction was only a maximum of $10,000. This limit was raised almost every year, but in January 2015, the limit was dropped to $25,000 from $50,000. The ceiling was, however, returned back to $500,000 thanks to the PATH Act, (Protecting Americans from Tax Hikes Act of 2015). This limit was a help against any form of uncertainty about any rules of small business tax deductions. With the signing of the H.R.1 law (The tax cuts and jobs act) and over time, the deduction limit was then increased to $1,000,000 by January 2018.
Before Section 179, small business owners could only deduct the value of the business assets which they purchased and a portion of their purchases’ value every year. With Section 179, however, a small business can now deduct the entire amount of a particular business asset purchase in the same tax year, in which the purchases were made. This helped to eliminate the hassle of depreciating (or deducting a certain sum in portions) on the basis of year by year over the equipment’s useful lifetime. This is an excellent advantage for a small business owner as it can help to reduce the amount of taxes which they pay each year. This means that now small business owners do not have to wait several years in order to get tax benefits from their equipment or asset purchases.
What you should know about Section 179?
- Under this tax code, there is a limit of $1,000,000 on the total amount of business property expenses, which can be deducted each year.
- Section 179 deductions can only be used for a used or new property which is purchased by a business. This tax code is not applicable for rented or leased property and neither it is appropriate for a property which is received as an inheritance or as a gift.
- Section 179 is only to be used for that property, which is to be used solely for the purpose of your business. You have to be using the property for the company at least half of the time, and the amount of your deduction is reduced by the percentage which is being used as a personal property.
- The purpose of this tax deduction is mainly for small and medium-sized businesses, and only those companies qualify for it which spend less than $2.5 million in a year in their business equipment purchases.
- From 2018 onwards, the annual deduction of $1,000,000 and the $2.5 million business investment limit annually will be indexed for inflation. This means that the number of deductions will continue to adjust each year slightly along with the rest of the prices in the economy.
Who qualifies for Section 179?
Under Section 179, this tax code is for any tangible property that is purchased by a business which the IRS has determined will be lasting for more than a year. The property which falls under this heading are:
- Business Equipment
- Office Furniture
- Business Vehicle (that weigh greater than 6,000lbs)
This rule can also be applied to a used or new property which you have purchased from another party. Any property which you do buy, have to be utilized by your business at least 50% of the time. For example, if you purchase a new computer for your business use but end up checking your personal emails time and again, this does not mean it will not qualify as a business asset. Instead one should only be careful that the asset is being used primarily for business-related issues. On the other hand, if you purchase a vehicle which is for your personal and for your business use, then you must document how much you use for each purpose in order for it to qualify. If you are using it for the business less than half of the time of its total use, then it does not qualify.
What to expect in 2019 for Section 179?
The year 2019 will not see any significant changes in the small business tax codes, but there are still a few essential things which should be kept in mind. In 2018, Congress introduced some significant adjustments in the business tax law, which also included a lower corporate tax rate, along with new rules for pass through business, as well as a tax break for some of the industries. These new laws will be taking some time for their implementation in this year, 2019 and as such, this year will be more of a year of adjusting to the changes as opposed to incorporating new changes. There are two aspects of the tax law which should be kept in mind for the business owners. That is, the 2018 tax reforms are still in the process of taking effect and for the business owners to understand that all regulations will be implemented and are essential when they are working with their tax professional. The changes that are noteworthy include first year bonus, net operating loss changes, and first year bonus depreciation.
Tips for Business Owners
If you are a business owner or new to the tax structures of small businesses, then there are a few things which should be kept in mind. Even though it is quite possible for a company to do their taxes on their own, it is, however, advisable for them to consult or consider working alongside a CPA. Having the guidance of a tax professional can help to make sure that the business is able to take full advantage of all possible deductions that are available.