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How Businesses and Contractors Can Capitalize on IRS Section 179

How Businesses and Contractors Can Capitalize on IRS Section 179
Guide to Government Contracting

Did you know that you can elect to recover all or part of the cost of certain qualifying property, up to a $500,000, by deducting it in the year you place the property in service? Designed to help kickstart business purchasing, businesses and contractors can take advantage of an IRS deduction filed under the name Section 179 that allows them to deduct the full purchase price (restrictions apply) from gross income in the year they place it into service.

Abstract

Since being signed into law in 1958, Section 179 has allowed businesses a simple way to expense depreciable business assets in year one, rather than spreading out depreciation expenses over periods ranging from three to thirty-nine years.

Currently capped at $500,000 (additional in certain economic zones, reduced amounts for qualified real property) on purchases up to $2MM, the amount that can be deducted decreases dollar by dollar by the amount spent that exceeds $2 Million (a $2.1MM purchase receives a $400K deduction, up to $2.5MM receiving $0)

Paired with a 50% year-one bonus depreciation for those expenditures exceeding $2MM, contractors, small and medium enterprises, and more have an unbeatable opportunity to make investments in their own business, decrease immediately their taxable income, and keep money that would otherwise be taken from them.

Background: Section 179 Through the Years

1958: Eisenhower Signs into Law the Small Business Tax Revision Act of 1958

The practice of deducting immediately the price of newly implemented equipment dates back over half a century to the sweeping tax reforms made during the Eisenhower presidency. The 1958 legislation provided that a taxpayer could elect to deduct, as additional first-year depreciation, 20 percent of the cost of certain depreciable property.

1981: Section 179 Gets an Update with the Economic Recovery Tax Act of 1981

Little changed until Reagan-era initiatives to kickstart business began to manifest. In 1981, when the ACRS depreciation rules were adopted, the section 179 rules were also revised to provide expensing of a greater amount.

1993 and 1996: Section 179 Limitation Increased

Under The Omnibus Budget and Reconciliation Act of 1993 and the Small Business Job Protection Act of 1996, the expensing provisions were set to increase each year through 2003.

For more on the early history of Section 179, a 2005 document from the Joint Committee on Taxation provides in-depth analysis into the numbers and history of the law. See Present Law and Legislative Background Relating to Depreciation and Section 179 Expensing (2005) for more.

2008 through 2016: Extension, Expansion, and Permanence under Various Acts

Initially intended to wind down, Section 179 allowed for businesses to expense up to $125,000 on qualifying equipment – and the deduction began to phase out for companies that spent over $500,000, per Section179.org. Prior to the initial Stimulus Act in 2008, Section 179 was slated to wind down in following years and ultimately be phased out completely.

However, due to a variety of stimulus acts passed throughout the years, Section 179 survived thanks to bipartisan support for the deduction designed to help small and medium businesses to purchase equipment and keep more of their hard-earned money.

The following table shows changes made to the code over the past decade:

Year Bill Deduction Limit Purchase Limit Notes
Feb. 2008 Economic Stimulus Act of 2008 (H.R. 5140) $250,000 $800,000 This Act also provided for 50% bonus depreciation, allowing businesses to write off 50% the cost over Section 179 Limits
Feb. 2009 American Recovery and Reinvestment Act of 2009 (H.R. 1) $250,000 $800,000 Extended 2008 Stimulus Bill
March 2010 Hiring Incentives to Restore Employment Act of 2010 (H.R. 2847) $250,000 $800,000 Retained $250k Limit, which otherwise would have dropped to $134,000, removed bonus depreciation
Sep. 2010 Small Business Jobs and Credit Act of 2010 (H.R. 5297) $500,000 $2 Million Expanded Section 179 for 2010/11, restored bonus depreciation for tax year 2010, but not for 2011.
Dec. 2010 Tax Relief, Unemployment Insurance Reauthorization, Job Creation Act (H.R. 4853) Expanded bonus depreciation over $2MM to 100% of the cost, allowed unprofitable businesses to carry over deduction.
Jan. 2013 The American Taxpayer Relief Act of 2012 $500,000 for 2012 (retroactive) and 2013 $2 Million Saved Section 179 for tax year 2012, retroactively raising the limit from $25K to $500K and kept limits in place for 2013
Dec. 2014 The Tax Extenders Bill $500,000 $2 Million Raised planned $25K limit to $500K and spending cap of $250K to $2MM. Kept 50% Depreciation
Dec. 2015 The Protecting Americans from Tax Hikes Act of 2015 $500,000 $2 Million Made permanent the $500K deduction limit, $2MM spending limit, and 50% bonus depreciation. Additional notes below.

 

Note: For purchases exceeding $2MM, there is a dollar for dollar decrease that you can deduct using Section 179. For a full list of changes to the bill, including amendments made in 1962, 1969, 1976, 2003, 2007, and more, see 26 U.S. Code § 179 – Election to expense certain depreciable business assets on the Legal Information Institute.

What Can be Deducted?

According to IRS Publication 946, Chapter 2, there are key categories that are included as a Section 179 deduction:

Tangible (non-Real Estate) Personal Property:

Any tangible property that is not real property. Tangible Personal Property includes machinery and equipment, property attached to or contained in a building (e.g. refrigerators, grocery store counters, printing presses, signs), gasoline tanks and pumps at retail service stations, and livestock (horses, cattle, hogs, sheep, goats, and mink and other furbearing animals).

Additional tangible property includes but is not limited to property used as an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, research facility used in connection with any of the activities above, or facility used in connection with any of the activities in for the bulk storage of fungible commodities.

Off-the-Shelf Computer Software

This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software.

Qualified Real Property

You can elect to treat certain qualified real property you placed in service during the tax year as section 179 property. If this election is made, the term “section 179 property” will include any qualified real property that is:

  • Qualified leasehold improvement property:  Generally, any improvement to an interior portion of a building that is nonresidential real property (rules apply).
  • Qualified restaurant property: Any Section 1250 property that is a building or an improvement to a building placed in service during the tax year.
  • Qualified retail improvement property: Generally, any improvement to an interior portion of nonresidential real property that is open to the general public and sells tangible property to the general public, AND the improvement is made more than three years after the building was placed in service AND the expenses are not made to enlarge or modify the structure of the building, add an elevator or escalator.

The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 for tax years beginning in 2015.

Property that Does Not Qualify

Per Section179.org, Non-Qualifying Property, some of the property and equipment that does not qualify for the Section 179 Deduction is listed below.

  • Real Property does not qualify for the Section 179 Deduction. Real Property is typically defined as land, buildings, permanent structures and the components of the permanent structures (including improvements). Other examples of property that would not qualify for the Section 179 Deduction include paved parking areas and fences.
  • Air conditioning and heating equipment is generally not eligible for the Section 179 Deduction.
  • Property used outside the United States generally does not qualify for the Section 179 Deduction.
  • Property that is used to furnish lodging is generally not qualified for the Section 179 Deduction.
  • Property acquired by gift or inheritance, as well as property purchased from related parties does not qualify for the Section 179 Deduction (No, you can’t sell equipment to yourself and qualify for Section 179).
  • Any property that is not considered to be personal property, may not qualify for the Section 179 Deduction.
  • Used Equipment (that is new to you) qualifies for Section 179, however used equipment does not qualify for Bonus Depreciation (if offered in a given tax year).

For additional notes including limitations, property acquisition exclusions, and other requirements, see Electing the Section 179 Deduction on the IRS website, or Nolo’s Guide to the Section 179 Deduction.

Electing the Deduction

To elect section 179, you must place the property in service in the same year you intend to take the deduction. For example, if you place property in service this month, you may elect the deduction for tax year 2016 using Form 4562. You must keep records that show the specific identification of each piece of qualifying section 179 property. These records must show how you acquired the property, the person you acquired it from, and when you placed it in service.

To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either your original tax return or an amended tax return that includes adjustments to taxable income.

50% Bonus Depreciation

For any purchase exceeding a $500,000 deduction, the alternative to Section 179 deduction is the 50% bonus depreciation. The 50% bonus depreciation allows a business to depreciate 50 percent of the cost of equipment acquired and put in service during 2015, 2016 and 2017, phasing down to 40% in 2018 and 30% in 2019. For more, see Nolo’s article on the 50% bonus depreciation.

For example, on a $650,000 purchase, you can deduct $500,000 using Section 179, another $75,000 using the 50% bonus depreciation, and another $15,000 under standard depreciation, lowering the total cost of equipment to $443,500 per Crest Capital’s Section 179 Tax Deduction calculator.

Taking Advantage of Tax Savings

Per Section179.org, Section 179 can provide you with significant tax relief for this 2016 tax year, but equipment and software must be financed and in place by midnight December 31, 2016.

The organization managing Section179.org, Crest Capital, has provided a ton of great resources on this document, including a whitepaper on Section 179 Financing Deductions, and the aforementioned calculator.

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