CONGRESS JUST DID SOMETHING RIGHT!
In a day and age when so many point out the shortcomings of our national leaders, it’s only fair to mention when Congress gets something right. They voted to expand and make permanent Section 179 business expensing in the federal tax code. (Caution: States don’t always follow the federal tax code. With regard to state income taxes, Indiana does not permit 179 expensing above $25,000. See I.C. § 6-3-1-3.5). This mini, but mighty, section of the code simplifies the tax regulations and reduces the cost of capital investment for America’s small and medium-sized business owners. If you own a business in America you need to know about and understand small business expensing.
Here are the basics: If you purchase and place in service “section 179 property” in 2016, then for federal tax purposes, you may elect to deduct the cost of that capital investment, rather than follow a depreciation schedule. You may deduct up to $500,000, which begins to phase out dollar-for-dollar once the total investment in Section 179 property exceeds $2,000,000.
Let’s look at a simple example. In 2016, your business buys and places in service machinery valued at $500,000. You may elect to deduct the entire cost of the machinery on your 2016 tax return, rather than follow a multi-year depreciation schedule. If you have had any experience with depreciation, you immediately see the benefits of this provision: (1) you can deduct the entire cost of the machinery in the year you spent the money; and (2) you reduce your administrative burden because you don’t have to keep track of a depreciation schedule years or decades down the road. Both of these advantages help reduce the cost of investment.
Let’s add a little twist. In 2016, your business buys and places in service machinery valued at $2,100,000. You may elect to deduct $400,000 of the cost of the machinery on your 2016 tax return, rather than following a multi-year depreciation schedule. Remember the dollar-for-dollar phase out? The cost of the machinery was $100,000 over the $2,000,000 limit. Therefore, your deduction is reduced by the same amount. ($500,000 - $100,000 = $400,000)
Not only did Congress pass section 179 expensing without an expiration date, it wisely added an inflation adjustment to ensure that the $500,000 deduction in 2016 is still worth $500,000 decades in the future. They did this by tying the deduction and investment limit to the Consumer Price Index and required upward movement in the limits in $10,000 increments.
Finally, it also appears to be the intent of Congress, as noted in the Ways and Means Committee summary, to permit investments in air conditioning or heating units to be treated as section 179 property. Prior to the new statute, 26 USC § 179(d)(C) defined section 179 property to specifically exclude air conditioning or heating units.
If you own a business, get to know and utilize section 179. Talk to your CPA about the changes and whether it makes sense to expense or depreciate your equipment. It may help you recover your investment costs quicker than depreciation and cut some of the federal red-tape. Note that this post is only a brief summary of section 179. It does not constitute legal or tax advice nor does it establish an attorney/client relationship. Should you have specific questions about your small business, contact Bonnie Coleman or Dan Blankenburg.
Hodges and Davis, P.C. - January 2016