The lowdown on IRS Section 179
Buying equipment before the year is over can bring considerable tax advantages, but you must understand and follow the law.
As we enter the last quarter of the year, equipment buying season begins, practice profits are calculated and potential tax liabilities are determined. “How can I save on taxes as year-end approaches?” is the question most accountants are asked.
The process of reducing taxes through year-end equipment purchases has gone on for years. So, how does 2018 stack up under IRS code Section 179 rules? Section 179 allows for the immediate expensing of equipment as long as the equipment purchase is placed in service before Dec. 31, 2018.
Effective for tax years beginning after Dec. 31, 2017, the maximum deduction limit is $1 million and the phase-out threshold is $2.5 million, meaning hospitals can purchase up to this amount in total equipment before the $1 million limit begins to be reduced dollar for dollar. Also, autos used in business can qualify for a Section 179 deduction of up to $25,000 as long as the business use is more than 50 percent and the vehicle is more than 6,000 pounds gross vehicle weight (GVW).
Building Expenses Count, Too
When completing your building project in 2018, you might find that certain expenditures qualify for the Section 179 deduction. These would encompass items such as roofs, heating, ventilation and air conditioning, and alarm, security and fire protection systems.
Always remember that Section 179 deductions cannot be used to create a loss to the business.
However, the IRS has provided expensing of equipment purchases under de minimus rules. This means that if you make an election on your tax return and do not complete an applicable financial statement, any purchase of a single piece of equipment for $2,500 or less can be expensed without the use of the Section 179 deduction and without regard to income limitation, so you can create a loss to the business by using this rule. The practice must have, at the beginning of the taxable year, accounting procedures treating these purchases as an expense for non-tax purposes as well.
As another example, the IRS has established rules under what is known as bonus depreciation in which equipment purchases can be 100 percent expensed. This includes new and used equipment, with conditions, and it can be used to create a loss to the business. Practice vehicles used more than 50 percent for business and that weigh more than 6,000 pounds GVW qualify for the bonus depreciation deduction. All practices must use bonus depreciation for equipment purchases unless they elect not to use it on their tax return.
The Clock Is Ticking
The bottom line for 2018 equipment purchases is you can pretty much assume that what you spend on equipment will lead to a full and complete tax deduction in the year of purchase. You can see more about what the IRS has to say about 2018 equipment deductions at http://bit.ly/2Q75lF7.
Tax planning can be complicated. Taking advantage of tax breaks can be great in the right circumstances, and in 2018 these will be just as good as in other years.
Always use the fall months to look at practice profitability and your estimated tax bill for the year. Meet with your tax professional and look for the best ways to use the law to your business’s advantage. Never assume you need to purchase equipment as a tax-savings strategy without the professional advice of your tax preparer.
Also, remember that when planning equipment purchases, consider the economic and financial benefits in addition to the tax savings. It makes no business sense to purchase equipment purely for tax reasons. You will want to find equipment that provides a return on investment, meaning you will generate enough money that the equipment will pay for itself and produce a profit.
When talking with your equipment sales person, the first question you should ask is, “How much will I generate in income from the use of this piece of equipment?” If you know you can generate enough income to provide a financial return that includes the cost and a profit, the cost will not matter.
These are equipment purchase rules to live by. Happy equipment hunting.
Gary I. Glassman is a certified public accountant and veterinary financial adviser at Burzenski & Co., P.C.