For the last several years, a favorite number of many businesses (particularly farmers) has been 179. Number 179 represents Section 179 of the Internal Revenue Code.
Typically, a business may have regular expenses like utilities or payroll. Explained most simply, a business receives gross income and then pays those regular expenses, which are offset from the gross income to create a “net income” against which income taxes are calculated.
However, there are certain items on which businesses necessarily spend money that are more permanent than regular expenses. Examples of these more permanent items include machinery, equipment and software.
The IRS provides a multi-year “depreciation schedule” for each of the “more permanent” items purchased by businesses. The schedules allowed the business to deduct from income an annual percentage of the purchase price over the useful life expectancy of the more permanent items.
For instance, a certain machine may have an eight-year depreciation schedule. If that machine cost the business $80,000 to purchase, the business could deduct $10,000 per year from the business’s gross income.
Section 179 has allowed businesses to decide to not depreciate (deduct the annual percentage) certain purchases of machinery, equipment and software over the depreciation schedule time period and instead treat the purchases as a regular expense like utilities or payroll.
Notably, there is a specific list of what purchases are eligible for Section 179 treatment. Additionally, there are limits on the value of the assets that a business can treat as immediately deductible under Section 179. In 2022, that limit is $1,080,000. Businesses can pick and choose individual assets or portions of assets under Section 179.
Section 179 presents a one-time opportunity for use. In other words, a business may not need to use Section 179 in the year the business purchases (and puts into use) a certain Section 179-eligible item. If the business has higher-than-expected gross income in year-two of the depreciation term of the originally Section 179-eligible item, the business cannot switch back to use Section 179 for the remainder of the purchase price that was not deducted from the gross income in the first year.
Section 179 can pump up the economy in the short-term, because businesses that experience higher income in a certain year can be motivated to make big purchases in that same year to offset the higher gross income. However, some businesses can be stuck in a vicious cycle of having to continuously purchase new equipment each year in order to offset income, because the business has no annual deductions from the earlier purchases.
Section 179 is slightly different from what is called “bonus depreciation”. Bonus depreciation has no annual limit but requires a business to deduct the full purchase price of all purchased assets in a certain asset class, and the business must use bonus depreciation for that asset class at the annual percentage amount, which is 100% in 2022, but which is set to decrease by 20% each year through 2026.
As always, consult with your tax advisor for specific tax advice.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.
