What is Section 179 and How Does it Work?
None of the following is considered tax advice. You should consult your CPA or tax advisor before making any decisions.
IRS Section 179 allows a business to treat purchases of depreciable assets as an operating expense in the current year. Often, the cost of assets that last more than a year cannot be deducted in one year. Instead, they must be depreciated throughout the useful life of the asset.
The IRS has schedules for depreciation ranging from 3 to 39.5 years, depending upon the asset. For example, computers may be depreciated throughout 3 to 5 years; an office building can be depreciated throughout 39.5 years.
Below is an example of how a CPA firm in Austin, Texas handles its computer replacements.
The firm has around 36 desktop and laptop computers, and replaces one third of those computers every year. Let’s assume an average cost of $1K per PC, for a total purchase of $12K in 2015. Using accelerated depreciation throughout a 5 year life, this business would deduct expenses as follows:
- Year 1: $2,400
- Year 2: $3,840
- Year 3: $2,304
- Year 4: $1,382
- Year 5: $1,383
- Year 6: $691
- Total: $12,000
Section 179 allows them to deduct the entire amount in 2015. Assuming the firm had a profitable year, and depending upon their tax strategy for the year, they would likely choose the Section 179 deduction. Assuming a 35 percent tax rate, a $2,400 deduction will reduce taxes by $840; a $12,000 deduction will reduce taxes by$4,200.
Changes to Section 179 in 2015
The maximum allowable Section 179 election has been reduced to $25,000 for 2015, significantly down from $500,000 in 2013-2014. In February 2015 the US House of Representatives voted to make the $500,000 election permanent. Earlier this year, the Senate Finance Committee passed a tax package covering Section 179, but it has not been considered by the full Senate.
Many experts are predicting that reinstatement of the $500,000 limit will happen and are advising businesses to go ahead and purchase capital equipment with this in mind, but unless Congress acts and the President signs it, the max will be $25,000 and ONLY UP TO $200,000 in qualifying purchases. Any qualifying purchases over $200,000 reduces the deduction dollar for dollar. What this means is that if you spend $225,000, none of the spend would qualify for the Section 179 deduction
At present, Bonus Depreciation is generally not available for property placed in service in 2015. Last year, Bonus Depreciation allowed larger businesses that spent more than $560K on new capital equipment to expense 50 percent in 2014. This too could be continued if Congress acts soon.
What Business Owners Should Know About Section 179
- The Section 179 Tax Deduction limit for 2015 is $25K
- The $25K limit includes most new and used equipment, and also includes software
- Your Section 179 deduction cannot exceed the amount of your taxable net business income for 2015
- If you spend more than $200,000 on qualifying property, your Section 179 deduction will be limited
- You can’t use Section 179 at all if you have a net loss for the year
- You can deduct the costs of computers, firewalls, servers, software and the labor to install and configure the equipment
To qualify, equipment purchased must be in place and in use in the business before midnight,December 31, 2015.
Take Action Now!
If you’re a MyITpros client and would like to take advantage of Section 179 Tax Deduction for computer or networking equipment and installation in 2015, you should contact us immediately. Remember, the equipment needs to be in place and in use before midnight, December 31. It takes time to prepare quotes, get approval, place orders, and schedule installations. A single computer purchase and installation could take a couple of weeks. A complex server project even longer.
Our goal for this blog is to answer the questions you ask. If you have any questions about cloud solutions or any other topic please email me at email@example.com.