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Section 179 Expensing

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Section 179 Expensing

 

When you buy capital equipment for your business, you can depreciate it over a period of time intended to approximate its useful life. You can also use first-year expensing to deduct some purchases immediately rather than depreciating them over time. Your deduction turns on the property’s asset class and business use percentage (“BUP”).

  • Asset class tells you how fast to depreciate purchases. Computers, for example, are “5-year” property, deductible over five years. The IRS publishes pages of depreciation schedules for different asset classes.
  • BUP tells you how much of your purchase to depreciate each year. If BUP tops 50%, you’ll generally qualify for “accelerated” depreciation, which lets you deduct your purchase faster. If BUP is 50% or less, or you’re subject to the AMT, you’ll generally use straight-line depreciation.

The 2017 Tax Cuts and Jobs Act lets you expense up to 100% of any qualified property you place in service between September 28, 2017, and December 31, 2022. That percentage goes down to 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. The bonus depreciation disappears in 2027; however, first-year expensing will remain.

First-year expensing lets you deduct the full cost of some items the year you buy, rather than depreciating them over time:

  • For 2018, you can expense up to $1,000,000 of “tangible personal property,” new or used (other than certain automobiles).
  • You can expense property you buy as late as December 31.
  • Your BUP must be more than 50% to qualify for expensing.
  • Your first-year expensing deduction for an activity can’t exceed your taxable net income from the activity. However, you can carry forward unused deductions to future years.
  • The deduction phases out by one dollar for each dollar of Section 179 qualifying property placed in service during the year that exceeds $2,500,000.

When you sell property you’ve depreciated or expensed, your basis is your original cost, minus depreciation, expensing, and any costs of selling. Gains are recaptured as ordinary income; losses are deductible in the year of sale.

Example: You pay $2,000 for a new copier (5-year property) to use 100% for business, and deduct the full $2,000. If you later sell the copier for $1,000, you’ll owe tax on your “recaptured” $1,000 gain.

 

 

 

 

 

 

 

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