In this summary, we cover:
- What Section 179 Deduction and the Bonus Depreciation are all about
- The advantages that come with Section 179 Deduction and Bonus Depreciation
- How Section 179 Deduction differs from Bonus Depreciation
- The effect of Section 179 Deduction and Bonus Depreciation on Tech and Manufacturing Firms
- Section 179 Deduction applies to new and used equipment and off-the-shelf software.
- The Bonus Depreciation stood at 50% in 2017 while in 2018 to 2023, it rose to 100%.
- Bonus Depreciation had been set to cease in 2014 but got extended up to 2023.
- Section 179 Deduction is permanent while Bonus Depreciation is temporary. This is the major difference between the two.
- Under Bonus Depreciation, tech companies can continue to take on new capital expenditures, in addition to the acquisition of used property while creating a rise in capital spending; which will increase the demand for manufactured items.
- Generally, Section 179 and Bonus Depreciation offer the taxpayer huge tax savings on their gross incomes.
Unless you are a tax attorney, an accountant, or simply a tax enthusiast, the words “Section 179” of the IRS tax code probably sounds infernal and too complex to ever understand. Well, this article is about to change that.
According to the official website of Section 179, this is a deduction that applies to new and used equipment and off-the-shelf software. The deduction only applies to equipment and/or software purchased during that particular financial year. In the current year 2018 for instance, only equipment or software purchased or financed, and put to use between 1st January 2018 and 31st December 2018 shall qualify for such a deduction.
Section 179 is an incentive designed by the US government to prompt businesses to invest in trading equipment. Basically, the section allows you to deduct the full cost of qualifying equipment from your gross earnings in a given financial year.
Initially, the section was referred to as the “Hummer Deduction” or the “SUV Tax Loophole”—this was because a number of businesses used the section to write-off the cost of qualifying vehicles; usually SUV’s and Hummers. However, in the recent past, that benefit has immensely been reduced—check out the current standing of the deduction here.
As much as the “Hummer Deduction” saw a drastic reduction over time, small businesses are still the biggest victors. And as we speak, Section 179 still remains to be one of the biggest incentives gifted by Congress to small businesses.
Section 179 or Bonus Depreciation still offers the larger entities great benefits—however; the very existence of the section was to offer their younger counterparts the much-desired tax relief. Believe it or not, a number of small businesses are saving tons of taxes using this section.
When it comes to Bonus Depreciation, the tax code will permit businesses to deduct a specified percentage of qualified investments made in the financial year which the asset was put to use. The Bonus Depreciation deduction was extended up to 2023 after its period expired in 2014.
It is vital to note that: Bonus Depreciation only applies to new property and the applicable rate in 2018 is a 100% deduction all the way to 2023. In 2017, the rate was at 50%.
The Bonus Depreciation is not a mandatory deduction—one can be exempted through an official election by the taxpayer upon attaching the election to his/her tax return.
What’s the good side of Section 179 and the Bonus Depreciation?
These two clauses would not mean much to a layperson if we don’t highlight exactly how they benefit their businesses. Here are the benefits of Section 179 and the Bonus Depreciation.
Equipment and Software Deduction
This is a huge win for qualifying businesses with qualifying assets. Section 179 and Bonus Depreciation reduces the taxable incomes of businesses that qualify for the deduction. A taxpayer will be allowed up to $1,000,000 in deductions from 2018 onwards—this is an increase from $500,000 deduction offered in 2017. In addition, from 2018 onwards, the phase-out threshold increased from $2 million to $2.5 million.
Firms have keenly been making use of this tax-saving clause in the tax code using qualifying assets. As mentioned earlier, assets purchased in 2017 qualify for up to a deduction of 50% while those acquired in 2018 to 2023 will qualify for 100% deduction.
Be sure to take advantage of these tax savings when the deduction is still high—there is a high likelihood of the percentage dropping to lower rates after 2023 in case it gets extended.
What’s the difference between Section 179 and Bonus Depreciation?
Section 179 covers both used and new equipment and software—this was different to the Bonus Depreciation that only covered new assets until recently. The bonus depreciation now includes used equipment starting from 2018. When it comes to permanence, the Bonus Depreciation is being offered temporarily until 2023; unless another extension is granted. Section 179 Deduction, on the other hand, is not temporary.
The Bonus Depreciation is designed for bigger firms that surpass the set Spending Cap of Section 179—Section 179 deduction is majorly meant to save the small businesses from huge tax burdens.
Point to note: After the year 2017, businesses will be allowed a Bonus Deduction of up to 100% on qualifying assets. This is expected to go on until 2023. In addition, the exception of certain specified properties allows up to 100% Bonus Depreciation up to 2023. However, Bonus Depreciation will continue to be available to certain general properties for about 20 years or so.
Section 179 allows for the deduction of the whole cost of a qualifying asset instead of recovering it through depreciation deductions. The deductible amount currently stands at $1,000,000 up from $500,000.
What is the Impact of these Deductions on Tech Companies and Manufacturers?
Tech companies have been affected by the recent tax code changes. The firms can now deduct capital expenditures on new and used assets in regards to Bonus Depreciation.
The change also has a great impact on manufacturers under the Section 179 Deduction. The impact of both Section 179 and Bonus Depreciation on qualifying business assets will have a greater effect on not only the final payable tax but also the overall profit. This will then have a ripple effect on the retained earnings which can be used to spur business growth and development.
These changes were introduced through The Tax Cuts and Jobs Act of 2017 (TCJA) in December 2017 by President Donald Trump. The changes are expected to cause a positive economic shift in the near future.