Using the Section 179 Tax Deduction for newly purchased assets is a carrot that the government is hanging in front of business owners, hoping they will bite. The decision to purchase assets while taking advantage of the generous benefits Section 179 offers, proves a powerful incentive for owners to act.
The law allows owners to deduct an expense from earnings of $500,000 in any one year, per business. However, there are exceptions that complicate the rule. The amount above only applies to qualified property, and is subject to a dollar and business income limitation. The dollar amount is $2,000,000, while the business income limitation amounts to a deduction that does not exceed the taxable income from the active conduct of a trade or business for the year in which a qualified Section 179 becomes available.
Further limitations or advantages exist which complicate this lucrative deduction. For a specifically defined enterprise zone business, the deduction increases by the lesser of $35,000, or the cost that is also qualified as a zone property placed in service before January 1, 2017. Unfortunately, only 50% of the property qualifies.
Other limitations apply to leased properties, real estate improvements, and more importantly, to cars employed in a taxpayer’s business. That limitation is $25,000 in any one year, and applies to SUVs designed to carry nine or fewer passengers behind the driver’s seat. This rule applies to any 4-wheeled vehicle that is rated more that 6,000 lbs gross vehicle weight, but not more that 14,000 lbs gross vehicle weight.
What is Considered a Qualified Property?
Before becoming inundated with all of the rules, the taxpayer must first qualify the specific asset. As is true for the deductible amount above, it seems the exceptions and qualifications swallow the rule. In some ways, it proves easier to just list property that does not qualify. The following are non-qualifying assets: land and improvements, leased property, property used for lodging, and energy property.
Within this group of assets, exceptions exist that have further qualifications. A classic example is computer software, which gives insight into asset types and their disparate treatment under the law. To qualify, the software cannot have an exclusive license nor any major modifications. In addition, it needs to qualify as an “off-the-shelf” product available to the public that generally excludes databases.
Beyond qualifying an asset and determining the deduction, the filing status also plays an important role. Married couples can enjoy a certain exception carved out by this rule. The treatment is the same as if one person took the deduction when filing jointly. If filing separately, they are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. The taxpayers have to allocate the dollar limit between themselves on an equal basis, unless they both elect a different allocation.
Contact us at Klein Hall CPAs to learn about the benefits and decisions behind taking the Section 179 deduction, and other tax strategies to help minimize your taxes. Do not let exclusions and rules confuse you; let us serve as your trusted advisor and consultant.