If you are not familiar with Section 179 Depreciation, then you are in for a nice surprise. Section 179 is an incentive program designed to encourage small businesses to purchase tangible, personal property (no real estate) to make them more profitable in the coming years. The underlying reason for Section 179 is to stimulate economic growth in the US economy.
Basically, Section 179 Depreciation means that you can deduct a lot more depreciation in the first year of an asset’s life. This only applies to assets placed in productive use and not assets that are held for investment. Vehicles are subject to slightly different rules.
Here is what it looks like for 2017:
100% Depreciation on assets up to $500,000
This means that under Section 179, the first $500,000 in new or used assets that you purchase and place in service before December 31, 2017 can be depreciated 100% in 2017.
Normal Depreciation on assets between $500,000 – $2,000,000
If you spend more than $500,000 but less than $2,000,000, you can claim normal depreciation on these assets using Modified Accelerated Cast Recovery System (MACRS) rules.
Bonus Depreciation on assets between $500,000 – $2,000,000
If you spend more than $500,000 but less than $2,000,000, you can claim Bonus Depreciation of 50% in 2017 but only for new assets. Used assets are subject to Section 179 but not Bonus Depreciation.
Phaseout of Section 179 between $2,000,000 – $2,500,000
If you purchase more than $2,000,000 in 2017, then you lose the Section 179 deduction at the rate of $1 for every $1 above $2,000,000. That means that the Section 179 deduction is lost once you reach $2,500,000.
Recapture of Depreciation
You must remember that if you sell an asset you must recognize any recaptured depreciation. Let’s say that you purchase an asset with a five-year life but expense it all in year one under Section 179 Depreciation rules. Then in year three, you sell the asset. Whatever the proceeds were in year three would be recaptured depreciation since the tax basis of the asset is zero since you took the Section 179 in the year that you purchased the asset.
While many people find depreciation rules rather difficult to understand, the rules around the Section 179 Depreciation are straight forward.