As our Houston construction lawyers discussed in the first section of this four-part article, with Section 179 deduction, business owners can buy, lease, or finance “business equipment” and deduct up to one million dollars of the total cost of that equipment when they file their tax return. However, for larger businesses that spend more than the $2.5 million cap limit to qualify, they can take advantage of Bonus Depreciation. This tax benefit is also currently available for up to a 100 percent deduction on the purchasing price of equipment in 2018.
Is Bonus Depreciation Right for You?
In past years, Bonus Depreciation was only offered to contractors that purchased new equipment. Under this new tax act, pre-owned equipment is also included. Most businesses will take advantage of Section 179 first, and once they have exhausted that spending limit, will then utilize Bonus Depreciation. However, there are some variables that can impact which tax option is right for your business.
Here are a few important differences between these two tax incentives:
- Cap Limit: Bonus Depreciation has no spending limit, so businesses can receive a deduction despite spending more than the Section 179 spending limit of $2.5 million.
- Taxable Income: You can only receive a Section 179 deduction if you have enough taxable income to qualify. If your business experiences a net loss for the year, you can deduct some of the purchasing cost through Bonus Depreciation; however, you are not eligible for the Section 179 deduction.
- Timeframe: Bonus Depreciation for 100 percent deduction is only expected to be available through 2023, so it’s best to take advantage of this incentive soon.
How Do You Apply for a Tax Deduction?
The first step is to buy, lease, or finance new or used equipment. The second step is to make sure you put that equipment into service this year. Lastly, when you file your annual tax return you must fill out the appropriate paperwork to activate these tax savings. Specifically, you need to include an Internal Revenue Service (IRS) form, IRS form 4562, and attach this completed document to your tax return.
Although you do have the option to fill out this form yourself, it’s best to consult with a Houston construction lawyer that specializes in tax law. We can assist you with filing your tax return and can also help you maximize the tax savings for your business.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.