You may have seen a lot of buzz about the Section 179 deduction on social media. But there's one factor that often goes unmentioned - depreciation recapture. This occurs when writing off the entire value of your assets and then selling them after utilizing the Section 179 deduction or retiring the asset before its useful life. Understanding recapture and its impact on asset expensing is key to making the best decisions as a business owner.

What is Section 179 and How Does it Affect Your Business?

Section 179 is a provision that allows small businesses to deduct the entire purchase price of qualifying equipment or software from their gross income. This encourages taxpayers to invest in their businesses by purchasing necessary equipment while alleviating some of the tax burdens that small businesses face.

What does the IRS consider qualifying property or software?

Per IRS Publication 946, a qualifying property has to have the following:

• The property is tangible, such as machinery and equipment. The TCJA was amended to include improvements to nonresidential tangible property that would typically be capitalized such as roofs, air conditioning units, and fire and security alarm systems.
• Must be owned by the taxpayer and used in their regular course of income-producing business
• A determinable useful life that is over 1 year.

Tangible property includes physical assets like vehicles, buildings, and equipment that last over a year. The IRS has set standard useful life spans for nearly all assets. Some examples are furniture and equipment's useful life of 5-7 years and buildings up to 27.5 years. The max deduction is $1M, with a phase-out limit of $2.5M.

Depreciation Recapture

Depreciation recapture is when the IRS asks you to pay taxes on the amount you claimed as a deduction but didn't actually deduct over time. For example, if you bought a vehicle over 6,000 lbs for $100,000, deducted it under section 179, and sold it after a year, you might owe taxes on $80,000.

While leveraging the Section 179 deduction can offer tax savings and facilitate business investment, it's crucial to understand the potential tax consequences associated with selling the asset prematurely. The gains from such sales are taxed based on one's current income level. If income has substantially risen since the asset was put into service, the benefits of the initial tax savings may be outweighed by the recapture amounts. By carefully considering the asset's useful life and reinvesting the proceeds into a qualifying asset, you can minimize depreciation recapture and sustain your business growth.

Sometimes the best move could be to depreciate the asset using the primary depreciation method, MACRS.

There's so much more to take into consideration when deciding how to treat your assets and potential disposals. If you need a hand, we're more than happy to help you out! Just drop us a line and let's take a look at your tax situation together. Don't hesitate to contact us!

The post Is Electing Section 179 Right For Your Business? first appeared on Reinspired Books, LLC.

The end of the year is approaching. What does this mean for business owners? It's time to start getting those books ready for tax time! As a business owner, do you know the types of expenses you can deduct for your company?

Every industry is different. Every business in each industry is different. What one company can deduct for the year does not mean it's deductible for a different company. All qualified expenses have one thing in common. According to the IRS, all expenses must be incurred in the pursuit of profits and not for personal reasons. Deductible expenses must be ordinary and necessary, meaning it's appropriate for the business under normal circumstances.

Here's a brief list of qualified business expenses:

• Advertising
• Car & Truck Expenses
• Depreciation
• Employee compensation and benefits
• Insurance
• Interest
• Legal Fees
• Office Expenses
• Rent
• Repairs & Maintenance
• Supplies
• Travel
• Utilities

All deductions must be reasonable amounts and be a for-profit activity to qualify.

Non-qualified expenses

Just as are there are allowable expenses, the IRS has guidelines on deductions that are not allowed. These expenses include penalties, fines, and illegal purchases and activities. Businesses selling cannabis, a schedule 1 drug, can only offset their gross income with the cost of the goods sold.

Expenditures not fully deductible during the tax year incurred are instead generally capitalized if the expense has a useful life of over one year.

Here's a brief list of examples of capitalized expenditures:

• Buildings
• Machinery & Equipment (over specified threshold)
• Similar properties such as trucks and cars
• Leasehold improvements (Direct & Indirect costs)
• Furniture & Fixtures

The post Business Deductions first appeared on Reinspired Books, LLC.