If your business is considering a year-end purchase to apply Section 179, there are a few things you need to know. Here are 10 frequently asked questions – and answers – about Section 179, plus one additional question to consider.
1. What Is Section 179?
Section 179 is designed to encourage small businesses to invest in themselves with equipment purchases by allowing them to take a depreciation deduction in the first year of purchase.
2. Is There a Spending Cap and Total I Can Deduct?
A total spending cap of $2.5 million has been applied to Section 179; once a company hits that amount, purchases become no longer eligible for Section 179 deductions. This year, the deduction limit is $500,000. Tentatively, the current Republican tax bill is planned to increase this to 1 million (which, if passed, would become effective in 2018).
3. I’ve Heard “Bonus Depreciation” Mentioned with Section 179 – What Is It?
Bonus Depreciation is applied after $2 million is reached, at 50%. When a company reaches the $2 million-mark in purchases, the deduction is phased out dollar for dollar. For example, a company that spends 2.1 million may deduct 400,000, a company that spends 2.2 million may deduct 300,000, and so on until the $2.5 million-cap is reached.
4. Is Bonus Depreciation Expected to Change in the Future?
Through 2017, bonus depreciation is available at 50%. Bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.
5. What Qualifies for Section 179?
Tangible, movable items are eligible for Section 179 deduction, including equipment, and some business-use vehicles and software. Assets like additional farm land or a new equipment storage building do not qualify for Section 179 deduction.
6. Is Section 179 Only Applicable to New Equipment Purchases?
Both used machines and leased equipment, in addition to new equipment purchases are eligible for Section 179 deduction.
7. What About Used Equipment in Terms of Bonus Depreciation?
Bonus depreciation cannot be applied to used equipment. Leased equipment, however, is an option. A leased payment can be deducted 100% and 100% of the payment can be depreciated.
8. I’ve Heard the Term “Like-Kind Exchange” – Does That Apply to Section 179?
Yes, it does. By taking advantage of the like-kind exchange, older equipment that has already depreciated can be upgraded, and the Section 179 deduction applied to the trade difference.
9. What’s the Date Range to Apply Section 179 in 2017?
To apply the deduction for tax year 2017, equipment must be financed or purchased between January 1, 2017 and 11:59 p.m. on December 31, 2017. Keep in mind any equipment purchases made this year, with the intent to apply Section 179, may already have used the deduction to its full potential.
10. Can I Hold This Year’s Section 179 Deduction Until Next Year?
Yes and there are reasons to consider doing so. For example, a business in a lower tax bracket now, but looking to grow in 2018, might want to hold off on deducting all or a portion of Section 179 until next year.
One additional, important FAQ is also one that will have a different answer for every company:
How do I know if Section 179 is right for my business?
With heavy focus on year-end decisions and the Section 179 opportunity, it’s smart to acknowledge it might not be the right decision for your business. If equipment isn’t needed, especially if your company can’t really afford it, the deductions and money-saving opportunities likely aren’t enough to justify the investment.
For some companies, however, Section 179 and year-end opportunities might be wise moves. As a bonus, most dealerships offer great prices on equipment this time of year, and that includes used machines and lease options.
All business owners should consult their accountant or trusted tax advisor before deciding to utilize the incentive. Find additional information on Section 179 or request more information.
When the decision has been made to make a purchase, look to a trusted dealership – one that cares about relationships with partners, not simply selling its most expensive machines. The experts at a dealership will help find the right machine to fit needs, and offer service and support long after the sale.
About The Author
Mark Kreps is Vice President of Agriculture Sales with RDO Equipment Co. and based in Moorhead, MN.
Learn more about utilizing this tax incentive and see new, used, or leased equipment options by contacting your local RDO Equipment Co. store.