Businesses can use IRS tax code Section 179 to deduct the purchase price of certain equipment or software for the current tax year. There are some limitations to this deduction.
What are some of the limitations to Section 179 deductions? First, there is a cap. The Tax Cuts and Jobs Act (TCJA) increased this cap from $500,000 to $1,000,000.
Second, the purchase must qualify for the Section 179 deduction. Most tangible property, facilities and “off-the-shelf” computer software meet the criteria to qualify for the deduction. Goods like vehicles for business use, software technology for use in the office, computers, office furniture and manufacturing tools or equipment are additional examples. The TCJA expanded the deductions available for property expenses. In some cases, the deduction can now apply to costs incurred to improve a non-residential building. This generally includes things like a new roof or updated fire alarm system.
Third, the deducted purchase must be more than 50 percent business use. Generally, a taxpayer can only deduct a portion of the purchase price if the property is not used solely for business purposes.
What about first-year bonus depreciation? The new law increases the depreciation limit from 50 percent to a 100 percent bonus depreciation. The TCJA allows this depreciation on property purchased and put in place after September 27, 2017.
In order to qualify, the taxpayer must meet certain criteria. Three examples include:
- Did not use the equipment prior to purchase.
- Property was not purchased from a related party.
- Purchase was not from a “component member of a controlled group of corporations.”
It is wise to plan carefully for this deduction and keep records of purchases to support the claim. This will prove invaluable in the event the Internal Revenue Service (IRS) conducts an audit.