Tax Benefits: Depreciation & Section 179

Depreciation:

Depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. This is beneficial because depreciation helps to reduce the taxes businesses must pay by reporting lower profits, higher expenses and tracking the decrease in the value of assets over time.

Limitations to Depreciation:

Depreciation is limited to most tangible property and some intangible property. Tangible property can include the following: machinery, equipment, buildings, vehicles, and furniture. While intangible property includes patents, copyrights, and computer software.

Section 179:

Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. This helps the business in decreasing the current year tax liability, as opposed to, deprecating the asset over time. Section 179 offers an immediate tax advantage and was created as an incentive to small business owners to invest in their business.

Limitations to Section 179:

Section 179 is limited to the following: cars, office equipment, business machinery, computers and certain improvements. In order to take advantage of section 179, property must be placed in service during the tax year that the deduction is being claimed.

You might be wondering if you should use depreciation at all. Why not just take advantage of the immediate tax benefit section 179 offers? If you move into a higher tax bracket due to increased income, accelerating your business deductions will give you fewer options in the future to reduce taxes. Section 179 also increases the risk of recaptured depreciation if you sell an asset for more than its accounting value. If you have trouble deciding which to use, don’t worry you can use both depreciation and section 179 in the same year!

Contact one of our tax accountants to discuss your business situation and help you determine which deduction method you should choose.

This article was written by Michaela Caudill, Accounting Specialist I with Baldwin CPAs. For questions or more information, please reach out to michaela.caudill@baldwincpas.com.