BGBC Partners, LLP Tax Update: Accelerated Depreciation Opportunities
Whether you are expanding your business to create an infrastructure for home delivery, enlarging your store’s warehouse capacity, or any other plans which require a significant capital outlay, you should always consider accelerated depreciation opportunities. In this segment of our Tax Update, we will review the major accelerated depreciation provisions which may help in offsetting some of the initial costs involved in most capital outlay decisions.
Section 179 allows you to deduct the full purchase price of equipment and software, up to certain limits, in the year it was purchased. The deduction is capped at $500,000 per year and begins to phase out once equipment purchases exceed $2,000,000. Beginning in 2016, the $500,000 cap and the $2 Million phase-out limit are both subject to annual inflation adjustments.
Here is an example of the tax benefits to a grocery store owner who purchases $650,000 of equipment with a 5-year tax life (ignoring inflation adjustments). Please note this example illustrates the interaction of Section 179 expensing, bonus depreciation, and regular depreciation:
$650,000 Equipment purchase
$500,000 Section 179 expense current year
$75,000 50% bonus depreciation taken current year
$15,000 Normal 1st year depreciation deduction
$590,000 Total 1st year depreciation
This example illustrates that a total of $590,000 of the $650,000 spent on equipment can be written off in the 1st year. This is enables grocery store owners to enjoy tremendous tax savings. Assuming a 35% tax bracket, the 1st year federal tax savings would be $206,500. The other good news concerning Section 179 is both new and used property are eligible. Only new equipment is eligible for bonus depreciation. When applying both Section 179 and bonus depreciation, Section 179 is generally taken first then bonus depreciation.
In short, when Section 179 is coupled with 50% bonus depreciation, the final cost of entering into the home delivery market can be greatly reduced!
There are a few exceptions to be aware of when deciding on buying equipment and selecting Section 179 status and bonus depreciation. Some property is considered non-qualifying for Section 179. This list includes real property (land/buildings), air and heating equipment, and any property acquired through gift or inheritance.
As a business owner, you must constantly evaluate the cost-benefit of all of your capital outlays. Accelerated depreciation is one of the major tax opportunities still available which can help lessen the initial costs of a such an outlay. Contact your CPA to assist you in evaluating how accelerated depreciation may benefit you and your business. As you know, a little planning up-front can prevent a lot of unnecessary cost down the road!
