How to Take Advantage of the Section 179 Tax Deduction

One of the major challenges of used equipment financing is finding ways to minimize the cost impacts of the equipment on the organization. A key strategy for softening the budgetary blow that used equipment financing poses is to take advantage of specific tax codes to reduce the business’ end-of-year tax burden—such as using like-kind exchanges (LKEs) when selling old equipment to make room for “new” used manufacturing equipment or taking advantage of the Section 179 tax deduction.

This year, there have been changes made to the Section 179 IRS tax code deduction that affect how manufacturers in the United States can benefit from this particular tax code. What are these changes? And, how can manufacturers benefit from them?

A Bit About the Section 179 Tax Deduction

As noted by H&R Block, the Section 179 tax deduction was a provision in the tax code that would allow taxpayers to write off “the cost of certain property placed in service during that tax year… if taxpayers used the property in an active trade or business.”

Prior to the Section 179 deduction, the most businesses could do to write off the tax burden for qualifying equipment would be write off a small portion of that equipment’s value using depreciation. This slowed down the write-off process, making it take years to complete. While better than no deduction, it dragged the process out and made it harder for manufacturers to reinvest in their businesses.

With the Section 179 deductions, businesses are now able to immediately write off a certain value amount of their qualifying equipment purchases in the year, giving them more capital to reinvest in their businesses sooner rather than later. Because of this, businesses can invest more freely in expanding their manufacturing capabilities.

What Changed with the Section 179 Tax Deduction in 2017 for Subsequent Tax Years?

In 2017, the Tax Cuts and Jobs Act (TCJA) was passed. Among other things, this Act changed certain aspects of the Section 179 IRS tax code deduction. The Fall 2018 issue of Spark IQ*, a publication put out by Capital One, has a story highlighting some of the most important changes, including:

• A doubling of the annual deduction limit from $500,000 in previous years to $1 million now.
• The phase-out limit for the deduction increasing to $2.5 million.
• An expansion of the “equipment” covered by the Section 179 tax deduction (including roofs, HVAC systems, security systems, and other “building improvements,” according to the Spark IQ article).
• An increase in the bonus depreciation rate from 50% to 100%.

These are a few of the major updates to the Section 179 tax deductions for 2018 that were introduced as a part of the Tax Cuts and Jobs Act of 2017.

Taking Advantage of the Increased Section 179 Tax Deductions

To take advantage of the Section 179 expense deduction in 2018, manufacturers need to do the following:

1. The manufacturer must purchase “Section 179 Qualifying Property.”
2. Have said equipment/property be financed and, as noted by Section179.org, “put into service” between Jan. 1 and Dec. 31 of that tax year.
3. Make sure to use Form 4562 when filing their taxes—and be sure to “make the election under section 179 to expense certain property.”
4. Consult their tax attorney or accountant prior to filing their taxes. These specialists exist for a reason and may be able to point out nuances that have not been covered in detail in this article.

That fourth point is especially important, because there may be exceptions to the tax code that apply which are unique to your business, state of residence, or other criteria that this overview article of the Section 179 tax deduction cannot anticipate. While the team here at SFMS has extensive experience in handling used equipment financing/purchasing deals, we do not claim to be tax experts. So, this article should not be construed as tax advice — just as an overview of the changes to and the potential benefits of the Section 179 IRS tax code deduction.

Once again, we urge you to consult with your tax attorney or accountant prior to making a major financial decision based on Section 179 deductions. Of course, we also urge you to do so sooner rather than later since the window of opportunity to claim the increased tax deduction for this year is drawing to a close.

Need help acquiring the right used manufacturing equipment to help you expand your capabilities while taking advantage of the Section 179 deductions? Contact the used equipment experts at SFMS today!

*Lake, Rebecca. “Big Deductions for Small Businesses: How recent changes to the Section 179 deduction could save you thousands.” Spark IQ, Fall 2018. p. 6-9. Print