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2018 Updates to Section 179

H.R. 1, aka the Tax Cuts and Jobs Act, which was signed into law on January 2, 2018, has already begun to have a widespread effect on businesses in every industry.  While planning for the year ahead, small businesses should take note of updates around the Section 179 tax deduction, which will heavily impact the calculation of 2018 taxes in April 2019.

A quick refresher for anyone who isn’t already familiar: Section 179 is a tax deduction that allows businesses to depreciate assets as an expense in the first year that they purchased them, rather than depreciating them over several years a little at a time. Using Section 179, a business can put those assets on its balance sheet, meaning they won’t become an expense for the company. Depreciating assets all in the first year helps reduce overall profit, which is the figure you ultimately end up paying taxes on.

With the passage of the Tax Cuts and Jobs Act, the deduction limit for Section 179 has doubled from $500,000 to $1 million for the tax year 2018 and the foreseeable future. The monetary limit on equipment purchases has also increased from $2 million to $2.5 million. There have also been some changes to what the deduction includes, with the addition of some improvements to existing nonresidential property: roofs; heating, air-conditioning, and ventilation systems; and fire protection, alarm, and security systems. These improvements must be placed into service after the property itself was first placed in service.

The other major change to Section 179 is the increase in bonus depreciation from 50 percent to 100 percent. Bonus depreciation comes into play once the Section 179 limit has been reached, and with the 2018 updates, includes used equipment along with new equipment. The 100 percent depreciation change is retroactive to September 27, 2017, and will be in effect through 2022. Starting in January 2023, the first-year bonus depreciation deduction will decrease as follows:

  • 80% for property placed in service during 2023
  • 60% for property placed in service during 2024
  • 40% for property placed in service during 2025
  • 20% for property placed in service during 2026

It’s important to remember that to qualify for bonus depreciation, property that is classified as “listed property” under the tax code must be used more than 50 percent of the time for business. Another change brought by the Tax Cuts and Jobs Act is that computers are no longer classified as listed property. As a result, on your 2018 filing, you can use bonus depreciation to deduct computers used less than 50 percent of the time for business.

Interested in seeing an example of the new Section 179 tax deduction at work? Check out our guide to calculating the deduction.

Knowing the changes to the Section 179 tax deduction for the 2018 tax year will be extremely helpful as you plan your business purchases throughout this year. While this post has provided a broad overview of the recent changes, you should discuss these updates with your tax adviser to understand how the new tax laws may affect your business specifically next spring. 

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