Is It a Write-Off or Depreciation?

Is It a Write-Off or Depreciation?

Under Section 179 of the Internal Revenue Code, you can elect to write off equipment used in business instead of depreciating the equipment over several years.

Prior to 2018, you could write off up to $500,000 worth of equipment in your business. Moreover, this election only applied to business equipment and NOT to equipment owned on investment real estate.

The new tax law greatly expanded your ability to use this provision in a number of ways:

First, the election can be used up to $1,000,000 worth of equipment purchases.

However, if you buy too much equipment (over $2.5 million worth of equipment) this election does phase out. Also, if you are an S corp or partnership, this 2.5 million limit on equipment purchases applies to both the individuals at their level as well as to the entity too. Thus, if you have a bunch of partners or S corp owners, check with your tax professional about how this might limit your ability to deduct up to $1 million worth of equipment.

Second, the new law expands the definition of qualified property to include tangible personal property used predominately to furnish lodging. Some examples of this change include beds, kitchen appliances, refrigerators and other equipment used in the living quarters of a lodging facility such as a rental home, dorm or other facility where sleeping accommodations are provided and rented out.

Third, the new law allows a deduction under this section for qualified improvement property, which simply means any improvement to an interior portion of a building which is a nonresidential real property.

Note: No improvement qualified if it enlarges the building or applies to any elevator, escalator.

It does apply to improvements on non residential property such as roofs, heating, air conditioning units, fire protection systems and alarms, and security systems. Thus, if you have a commercial office building, you can use section 179 to write off these items.

Fourth, taking an immediate deduction for equipment will not affect your ability to use the 20% pass through deduction. This deduction for higher income taxpayers who are not in certain specified businesses is limited to 50% of wages or 25% of wages PLUS 2.5% of the unadjusted basis of property. This means in simple terms that your original cost of the equipment is used in calculating the basis of equipment for the 20% pass through deduction.

Thus, if I buy a $50,000 truck, write if all off in one year, my basis for purposes of the pass through deduction limit is still $50,000.

As you can see, there were a number of changes here as a result of the Tax Cuts and Jobs Act that everyone should both know about and take advantage of.

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