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Max out on Section 179 deduction

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in Small Business Tax,Small Business Tax Deduction Strategies

The Section 179 deduction is one of the “biggest and best” tax breaks for small business owners.

Strategy: Take full advantage of the deduction, but watch out for a key limit. This might reduce your deduction when you file your 2017 return in 2018.

However, with some nifty tax footwork, you can still max out on the deduction this year.

Here’s the whole story: Under Section 179 of the tax code, a business can “expense” (i.e., currently deduct) the cost of qualified business property, up to a specified amount for the year.

Qualified property includes business assets with a cost-recovery period of 20 years or less, depreciable software that is not amortized over 15 years, qualified leasehold improvements and water utility property. The property can be new or used.

Potential pitfall: The Section 179 deduction can’t exceed your net taxable income from your business activities (calculated before the Section 179 deduction). Therefore, you may not be able to claim the maximum deduction this year, but you still have time to turn things around.

For example, suppose that your S corporation acquired $300,000 of qualified Section 179 property in 2017, but expects to only have $200,000 in income. Normally, you would defer income at the end of the year to lower the S corp’s tax bill and yours in turn. But you might want to accelerate income into this year and shelter it with an increased Section 179 deduction.

Say your business uses the cash method of accounting for tax purposes and is owed $100,000. If you push to have the invoice paid in full in 2017, you can still qualify for the $300,000 Section 179 deduction this year because your business will have $300,000 of taxable income.

Tip: The cost of property that isn’t expensed is generally eligible for regular and bonus depreciation deductions.

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