For decades, end-of-year purchases of business assets and property have been common. The idea is to show a lower profit, reduce the company’s tax obligation, and see an immediate benefit by making those investments towards the end of the year.
At the end of 2017, the Tax Cuts and Jobs Act (TCJA) was passed. The TCJA includes new, business-friendly rules that could prove beneficial if you’re looking to invest in your business. More specifically, changes to two methods commonly used to expense certain assets – Section 179 and bonus depreciation – allow businesses to expense the full amount of more purchases.
We consulted with Joseph Maida, Managing Partner of Maida & Maida Certified Public Accountants (formerly Maida Mackler) of Cranbury and Ewing, a third-generation CPA firm founded more than 80 years ago. Mr. Maida explained some of these changes and the potential tax-related benefits to businesses.
Changes to Section 179
Section 179 of the IRS tax code was originally created to encourage small businesses to invest in their businesses by allowing them to deduct 100 percent of purchases of eligible property, such as software and equipment. Under the TCJA, the maximum Section 179 deduction increased from $500,000 to $1 million.
Keep in mind that you can fully expense items up to $2,500 without treating each item as a capital asset and going through the depreciation process. The limit was increased to $2,500 from $500 in 2015.
For example, if you buy 10 office desks for $1,000 each, you can deduct the full amount for each desk, even if they’re on the same invoice, because the cost of each item is under $2,500.
Changes to Bonus Depreciation
Bonus depreciation allows you to deduct a portion of the cost of qualifying property immediately instead of deducting the cost over the course of the property’s useful life. For more than a decade, you could deduct 50 percent of the purchase, but that number was scheduled to be reduced to 40 percent in 2018 and 30 percent in 2019.
Under the TCJA, the full 100 percent bonus depreciation deduction was restored for qualified property purchased and placed in service between September 28, 2017 and December 31, 2022. For example, if you purchased those 10 office desks for $10,000, you previously would have been able to deduct $3,000 if you elected bonus depreciation. The new tax law allows you to deduct the full cost. However, the bonus depreciation rate will start to phase out in 2023.
The new rules also allow you to use bonus depreciation for the purchase of used property that’s “new to you,” while the old rules limited bonus depreciation to new, never-before-used property.
Talk to Your Accountant
This is tax law. It’s complicated stuff. Eligibility requirements can be confusing. Section 179 can be used in combination with bonus depreciation in some cases. Many states don’t follow the new rules, which means you might only be able to apply them to your federal tax return. And there are always exceptions. This article only scratches the surface of recent changes to the tax code and shouldn’t be taken as financial advice.
The takeaway here is that every business owner should be consulting with their accountant for year-end tax planning. Find out the tax benefits of making certain investments before the end of the year. See if purchases that were too cost-prohibitive in the past are more feasible now.
Remember, changes to the tax code don’t just apply to office furniture purchases. You might find that you’re in a better position to invest in technology, software, vehicles, and other assets that can help you grow your business. We encourage you to speak with your accountant to find out which investments make the most sense from a tax and business perspective.
If you find that an office furniture purchase is in the cards for the end of 2019, call 732-641-2791 or visit our showroom in Monroe to see our selection of office furniture in person!
