John R. Bullis: Section 179 depreciation deduction
November 20, 2017
There's a special deduction for businesses that buy personal property for use in the business. Section 179 deduction is for the cost of equipment (new or used) and Qualified Real Property that's purchased and placed in service before the end of the year.
The deduction can be as much as $500,000. It's OK if you don't pay cash for the equipment. The deduction is allowed if you buy the equipment and you can pay for it in the future.
A small business owner who files Schedule C-Business income and expense for their individual income tax return form 1040 can save two kinds of taxes. It reduces taxable income so that reduces their income tax and it reduces the self employment tax (FICA and Medicare) as well.
It's not smart to buy equipment you don't need. But if you were going to buy equipment in the next few months, maybe buying and placing in service before the end of the year is good to consider.
The Section 179 deduction can't be more than the taxable income (computed before that deduction). There's a possible carryover that can be available in some instances.
It's not allowed if the cost of all the equipment purchased in 2016 is more than $2,010,000. So General Motors isn't going to get this deduction. It was put in the law primarily to help small business owners, hoping they would then create more jobs.
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A taxpayer can elect to treat the cost of qualified real property, up to the $500,000 limit in 2016.
The tax laws have various special definitions and limits, but the deduction can be a real help in reducing income tax for small business owners or corporations that operate a business.
It's possible a return was filed that didn't elect the benefits of Section 179. The taxpayer may make, revoke or change an election on an Amended Return, without IRS special consent. The Amended Return can be done for the recent three years since the Statute of Limitations limits the years that can be amended.
The election is allowed for computer software if it's 'off the shelf' — available to the general public, hasn't be substantially modified and has a depreciation useful life of three years or more.
The property purchased from certain related persons or from members of a controlled group or is inherited doesn't qualify for Section 179 deduction.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.