Tax Planning 2020 – Section 179 Deductions

This article is intended for informative purposes only and is not presented as tax advice.  There are no representations of complete tax guidance, as this is a summarized report.   The reader is responsible to consult with a qualified tax advisor and not to rely on the content herein. This article is intended to provide you with a basic understanding to have a meaningful discussion with your tax preparer.

Section 179 is the commonly used term for a tax law of the same name.  Section 179 of the Internal Revenue Code grants a deduction of up to $1,040,000 in 2020 for the acquisition of new and used depreciable assets that meet certain qualifications.  The asset must be purchased, not leased and put in to service before the deduction may be realized.  The tax year in which both conditions are met is the year in which the deduction may be applied to the tax return.

If you take a Section 179 deduction, depreciation cannot be deducted for the same purchase.  The good news is that for the same qualified asset, some of the cost can be deducted as Section 179 and the remainder may be depreciated.  That can work in your favor, if you reach the Section 179 limit.  You also have the option of saving any 179 deduction in excess of taxable income by carrying the unused balance forward to unlimited future years.  All of these options are of course contingent upon having taxable income to apply the credit.  The nice reality is, you have options, not a straightjacket.

We are of course pleased that software qualifies for Section 179, if the license to use is purchased and not leased.  Furthermore, the software must be generally available to the public, which includes suitability for a specific industry, such as alarm dealers and security integrators.  The software cannot be written or highly customized for a single company to be eligible.  Bottom line is the potential Section 179 tax write-off can greatly reduce the first year of cost.

As a rule of thumb, the savings is according to your top tax rate.  That could be as much as 37% for a Subchapter S company at the highest individual tax rate.  The actual rate depends on your individual circumstances and business structure.

As if that wasn’t enough.  There is another alternative for write off on taxes through something called bonus depreciation.  It’s similar but with different rules.  Most alarm dealers are not big enough to use bonus depreciation, but it’s always good to be aware.  With Section 179 the taxpayer can pick and choose which specific assets to expense.  With bonus depreciation the taxpayer must treat all assets in the same class the same, no picking or choosing.  Real estate upgrades may be expensed through Section 179 but not through bonus depreciation.  Accordingly, the complex ramifications of making a choice between these options is well beyond what I intend to cover in this article.

How much taxable income you have will really determine if you should use Section 179 or bonus depreciation to your advantage.  The tax advisor will assess your situation and determine which of these options will result in the lowest tax.

AMS Pro can help you organize your financials to make it easy for your tax advisor.  Having verifiable and detailed information as the foundation of your tax return will result in a lower cost of tax preparation and a better night of sleep when you file the return.

Bob

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IRS December, 2018