Clock is ticking on end-of-year tax breaks for small businesses
As we count down toward the end of yet another year, it’s a good time for our business clients to consider the year-end tax breaks available on certain purchases and expenses. This year’s opportunities are among the most generous in recent memory, thanks in part to changes included in the Tax Cuts and Jobs Act of 2017. A sampling is detailed below.
Section 179 expensing election
This allows you to deduct (rather than depreciate over a number of years) the cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software, qualified improvement property. For qualifying property placed in service in 2019, the expensing limit is $1.02 million. The break begins to phase out dollar for dollar when asset acquisitions for the year exceed $2.55 million. (These amounts are annually indexed for inflation.) You can claim the election only to offset net income, not to reduce it below zero to create a net operating loss.
Qualified improvement property includes fire protection and security systems, heating and air conditioning units, and roofing. It does not include improvements to elevators, internal structural framework of a building, or enlargement of the building.
This additional first-year depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property, and some qualified improvements.
Under the TCJA, through 2026, the definition has been expanded to include used property and qualified film, television and live theatrical productions. For qualified assets placed in service through Dec. 31, 2022, bonus depreciation is 100%. In subsequent years, bonus depreciation is scheduled to be reduced as follows:
- 80% for 2023
- 60% for 2024
- 40% for 2025
- 20% for 2026
For certain property with longer production periods, these reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.
Tangible property repair safe harbors
A business that has made repairs to property, such as buildings, machinery, equipment and vehicles, can expense those costs and take an immediate deduction. But costs incurred to acquire, produce or improve tangible property must be depreciated. Distinguishing between repairs and improvements can be difficult. Fortunately, some IRS safe harbors can help: 1) the routine maintenance safe harbor; 2) the small business safe harbor; or 3) the de minimis safe harbor. The rules are complex, so contact your Weiss tax professional for details.
If you’ve recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated much faster and dramatically increase your current deductions. Typical assets that qualify include decorative fixtures, security equipment, parking lots, landscaping and architectural fees allocated to qualifying property. The benefit of a cost segregation study may be limited in certain circumstances – for example, if the business is located in a state that doesn’t follow federal depreciation rules.
Vehicle-related tax breaks
Business-related vehicle expenses can be deducted using the mileage-rate method (58 cents per mile driven in 2019) or the actual-cost method (total out-of-pocket expenses for fuel, insurance and repairs, plus depreciation).
Purchases of new or used vehicles may be eligible for Section 179. However, many rules and limits apply. For example, the normal expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. A $25,000 limit applies to vehicles (typically SUVs) rated at more than 6,000 pounds but no more than 14,000 pounds.
Vehicles rated at 6,000 pounds or less don’t satisfy the SUV definition and thus are subject to the passenger vehicle limits, and for 2019 the first-year depreciation limit is $18,000 ($10,000 plus $8,000 bonus depreciation).
Also keep in mind that, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and non-deductible personal use. The depreciation limit is reduced if the business use is less than 100%. If business use is 50% or less, you may not use Section 179 expensing or accelerated regular MACRS may not be used; the straight-line method must be used instead.
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