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2020 is coming to a close. (We are grateful for that in many ways!) If you are a small business owner, it is a great time to think about tax savings and whether your business needs equipment and other depreciable property.
Section 179 allows depreciation tax deductions for business property, and the election can be a tax windfall to companies, allowing them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2020 can be written off this year, but in order to benefit in this tax year, you need to buy and place qualifying assets in service by December 31.
So, what qualifies?
The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.
In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in lodging furnishing, such as furniture and appliances.
The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs, heating, ventilation, air-conditioning equipment, fire protection, and alarm and security systems.
- The annual deduction limit is $1.04 million for tax years beginning in 2020, subject to a phaseout rule.
- Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year.
- The amount is $2.59 million for tax years beginning in 2020.
- Note: Different rules apply to heavy SUVs.
Taxable income limits
There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).
What about bonus depreciation?
The Tax Cuts and Jobs Act (TCJA) changed bonus depreciation. Before the TCJA, you could only deduct half of the cost of qualified new property. Now, rather than capitalizing on their balance sheets and gradually depreciating them, businesses are allowed to deduct 100% of the cost of certain assets in the first year.
This tax break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year until it’s fully phased out after 2026 (or after 2027 for certain assets described above).
Bonus depreciation is allowed for both new and used qualifying assets, including most categories of tangible depreciable assets other than real estate.
Section 179 deduction vs bonus depreciation
If Section 170 deduction and 100% first-year bonus depreciation are available for the same asset, it is generally better to claim 100% bonus depreciation because of the lack of limitations.
These depreciation deductions might be the good news your business needs in 2020. Call us at 949-860-9902 or click here to contact us if you have questions or want more information about how your business can maximize the deductions. We look forward to speaking with you soon.