If your eyes glaze over when you read the word “depreciation” you are not alone. While depreciation is simply deducting the cost of business equipment over time, special tax provisions allow flexibility in how much can be expensed in a given year.
The first solution is the Section 179 deduction. You are able to write off the full (versus depreciated) cost of qualified new or used business equipment, up to $510,000 during 2017. The equipment must be purchased and placed in service by the end of the year to qualify. If your total business equipment acquisitions exceed $2,030,000, then the deduction is limited dollar-for-dollar for purchases in excess of that amount. For example, if in 2017 you have $2.2 million of qualified equipment purchases, the most you can deduct under Section 179 is $340,000.1
When you have maxed out the Section 179 deduction, you then turn to “bonus” depreciation. It’s a bonus in the sense that instead of deducting the cost of equipment over its useful life (as defined by the IRS), you can immediately deduct 50% of it in the first year. Keep in mind, unlike Section 179 property, this is for new equipment purchases only.
What’s more, you can double-dip your deductions using both Section 179 expensing and bonus depreciation in the same year. For example, assume you purchase a qualifying new machine costing $1 million. You can write off $510,000 under Section 179, then 50% of the balance ($245,000) under bonus depreciation rules, for a total deduction of $755,000.
The bonus depreciation rate drops to 40% in 2018, so this might be a good year to make a major equipment purchase. Give our office a call to consider your various options. (1702)
$2,200,000 – 2,030,000 = $170,000 excess purchases
$510,000 – $170,000 = $340,000 available Section 179 deduction
KNOWING “THE LINE” CREATES OPPORTUNITY
A simple way to think about your 1040 tax return is focusing on a single line, your Adjusted Gross Income (AGI). Anything “above the line” creates an AGI that can yield tax opportunities or tax consequences for anything “below the line.” Being aware of “the line” and the impact it has on your tax return can help you make better tax decisions throughout the year.
Understand the line. When you hear “the line,” it’s referring to both the last line on page one and the first line on page two of your 1040 tax return. The AGI line is made up of W-2 wages, tips, and other income; interest and dividends; capital gains/losses; alimony; pensions, annuities, and social security income; and business activity profits and losses. It also includes a number of miscellaneous items that can reduce your AGI such as educator expense, moving expense, student loan interest, and alimony paid.
The list of things that impact AGI can be lengthy. What is important, however, is understanding that this single line has a tremendous impact on what your final tax bill will be.
It’s also important to consider below the line impact.
Phase outs. If your AGI is too high, you could be in for an unpleasant tax surprise because so many of your “below the line” tax benefits can be phased out. This could include losing up to 80% of your itemized deductions, all of your exemptions, and access to most credits.
Alternative minimum tax. A high AGI can subject your tax return to a below the line calculation using an alternative tax table.
Marginal tax. Your AGI can subject some of your income to higher tax rates up to 39.6%.
Understanding the importance of “the line” on your tax return can help clarify suggested tax planning actions. How much can you add to your AGI and still be subject to a lower tax rate? Does an increase in your AGI phase out other tax benefits?
While you can analyze the numbers yourself, consider contacting us to assist you in understanding how your above the line decisions might change your below the line tax implications.