Understanding Section 179: Our Interview with a CPA, Part One

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Does talking or thinking about handling taxes for next year make your head spin? That’s fine, we get it. We understand that comprehending the intricacies of Section 179 for businesses is confusing and probably the last thing on your mind.

We’re here to help. Direct Capital wanted to find the best way to present Section 179 to business owners like yourself; a way that wasn’t overbearing or confusing.

So, we thought we’d turn to the experts. We sat down with Certified Public Accountant, Tanya Ouellette of New Hampshire-based, Raiche & Company to get the scoop. What do business owners really need to know about Section 179? You’re about to find out.

Congress has yet to decision whether it will expand Section 179 limits and bonus depreciation for the 2015 tax year. Legislation to expand Section 179 limits for 2015 (and possibly beyond) has been proposed in both the House and Senate and Congress is expected to address the issue during the Fall Session.

This is part one of a two-part series. Stay tuned for part two coming up next week!

Can you explain in laymen’s terms what Section 179 is?

It is basically a way for businesses to depreciate assets as an expense in the first year, or the year you purchased the asset. Let’s say you purchase a backhoe for $200,000. Section 179 allows you to expense that instead of capitalizing and depreciating it over the life of the asset.

With that $200,000 backhoe, what typically happens is that it gets depreciated, or goes down in value, over its life. For a piece of equipment, their lifespan is usually five years. So what you end up doing is dividing the cost of that asset by its number of expected years.

In this example it’s $200,000/5 = $40,000. This means the asset will depreciate by $40,000 each year.

What we do is we capitalize this asset and put it on the balance sheet. It doesn’t become an expense for the company.

Let’s say your profit for the year is $100,000. You’ve got $30,000 in other expenses, you also get that depreciation of $40,000 so it helps to reduce what your profit is, which is what you ultimately end up paying taxes on. So what Section 179 allows you to do is take that full $200,000 in year one as opposed to over five years.

Section 179 is limited. I believe in 2015, it’s limited to $500,000. For a small business owner, they’re probably not going to max that out. But larger companies will probably use up to that $500,000.

I’ve worked with hotels where we’ve used up to the $500,000, which they can expense in their first year as opposed to depreciating it.

Now, different assets have different depreciation lives so furniture and fixtures we usually do over 7 years, if you have a rental property we do it over 27 ½ years. So being able to utilize Section 179 now can be a real tax savings for people.

A lot of times what I do with a lot of my corporate clients is meet with them towards the end of the year, like in December, and see how they are doing. We’ll take a look at their accounting software and their profit and loss statement to see where they’re at. Let’s say they have $100,000 net income at the end of the year, after all their normal expenses, we might sit down and say, ‘Hey, are you still looking to buy that truck? Now’s a good time, let’s try to reduce your profit because we can take that Section 179 and fully depreciate that asset.’

Section 179 can be a real good tax planning tool to use.

Do you find that the business owners you work with actually understand and use Section 179? Do they take your advice to purchase the equipment now?

Yeah. They may not understand it, but we advise them. We show them what the difference is. If your profit is $100,000 versus $50,000 and we tell them what their tax rate is on that, they realize they want to take advantage of Section 179.

When do you think it’s a good time for them to start thinking about this? Is December too late or is that prime time?

It really depends on the needs of the business because if you need a backhoe in January, you need a backhoe in January. But if they are looking to do tax planning and tax savings, you need to do this before before 12/31. A lot of times it’s October, November, December when we’re doing planning with our clients. It may be hard to determine what your net income is going to be in October because you don’t know how your next two months are going to be so a lot of our clients wait until pretty much the last minute.

What would you say the most common question you get from business owners about Section 179 is?

‘Can I do it? Can I use it?’

We have a lot of people that have rental properties and you can’t 179 a building. It won’t allow you to. There are certain assets that you can 179, and certain assets that you cannot. Usually it’s equipment. You can’t do improvements or remodels. There are just certain things you can’t do.

See tables below for more information on qualifying and eligible Section 179 property.

Table graphics

Table graphics

 

In our next post, you’ll learn how an accounting firm, like Raiche & Associates, can help you navigate Section 179 and what other tax deduction options are available if you don’t qualify!

About Tanya and Raiche & Associates

Tanya Ouellette joined Raiche last October. Prior to Raiche & Associates, she worked at a couple other small firms on the Seacoast for five years and for eight years before that she worked at a firm in Boston. She grew up in New Hampshire, on Lake Winnipesauke, and went to UNH. From there, she fell in love with the Seacoast. She graduated from UNH with a degree in Business Administration and has a Masters in Tax from Bentley College.

Raiche & Associates is your typical advisory tax and accounting firm. They provide businesses with tax compliance, but more importantly, the advisory piece – doing the tax planning at the end of the year is where they add their value. They are the CPAs that help to advise business owners and individuals. They have two office locations in Rochester and Dover, New Hampshire.