There are times in the lifecycle of a small business when spending money now could really pay off later. New equipment or technology might help streamline operations or improve employee productivity. Maybe a larger facility is needed or there’s an attractive opportunity to expand into a new market.
The U.S. tax code generally encourages investments made to strengthen or grow a business. For example, a deduction for depreciation may be taken on business property that will become obsolete or wear out over time. Depreciation applies to assets such as business vehicles, machinery, computers, and office furniture. The cost is capitalized over a set period of years according to the Modified Accelerated Cost Recovery System (MACRS) established by the IRS.
However, the following provisions may allow larger immediate deductions that could reduce a tax bill further. Check with your tax professional about which purchases might be eligible for Section 179 expensing, bonus depreciation, or both.
Under IRC Section 179, small businesses may elect to expense the cost of qualifying property purchased and put into use during a designated year, rather than recovering the costs over time through depreciation deductions. In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business.
In 2017, the maximum amount that can be expensed is $510,000, and the deduction phases out when property placed in service exceeds $2,030,000. A married couple is treated as a single taxpayer with respect to the dollar limit and phaseout threshold, which are indexed for inflation.
In 2017, an additional 50% first-year depreciation deduction is available for eligible property placed in service during the taxable year. The bonus percentage is scheduled to be reduced to 40% in 2018 and 30% in 2019. The basis of the property and the regular depreciation allowances in the year the property is placed in service and later years are adjusted accordingly.
The scheduled drop in bonus depreciation means there may be some incentive to invest before the end of 2017. However, Congress is considering tax-reform measures that could affect your decision. You might pay attention to the progress of potential tax legislation and consult your tax professional before you take any specific action.