New tax law gives us good news related to the depreciation deduction.
Benefits of the Section 179 Deduction and Bonus Depreciation
Let’s assume you purchase $250,000 of equipment for your car wash from Harrell’s in 2016. There are three ways you can achieve a depreciation tax deduction from making this purchase.
Section 179 Deduction
The section 179 deduction has now been permanently extended. A business can now deduct $500,000 worth of equipment and qualified property purchased in 2016. However, that $500,000 amount is phased out and decreases if a business purchases more than $2 million worth of equipment and qualified property during the year. This is a dollar for dollar phase out for purchases above $2 million and the section 179 deduction is completely eliminated when total capital expenditures exceed $2.5 million for the year.
The section 179 deduction is further limited by the amount of taxable income a business ends up with each year. For example, if a business finishes the 2016 tax year with $100,000 of taxable income then that business can only deduct $100,000 worth of equipment purchased under section 179. If a business finishes the year with a taxable loss than no deduction is permitted under section 179.
The $500,000 section 179 deduction will be indexed for inflation in future years and will increase by $10,000 increments per year.
Congress recently extended bonus depreciation through 2019. Businesses will now be able to utilize bonus depreciation to deduct 50% of the cost of equipment and property placed in service during 2016 and 2017. This deductible percentage will be phased down to 40% in 2018 and 30% in 2019. If Congress fails to act the bonus depreciation deduction is set to expire in the year 2020.
Bonus depreciation is extremely beneficial for businesses because it allows for larger depreciation expense deductions for capital expenditures and thereby lowers the taxable income of the business and the amount of tax owed by the business or its owners.
It may be advisable for businesses that plan on purchasing equipment to consider making those expenditures in 2016 or 2017 in order to take advantage of the larger bonus depreciation deduction in those years.
If the cost of equipment and property purchased by a business exceeds the amount deductible under bonus depreciation or section 179 the remaining cost can still be depreciated and deducted using the modified accelerated cost recovery system (MACRS).