Qualifying for the Section 179 Deduction

By Jeff Brannon

Tax time is here, and for business owners that means it’s time to itemize all the purchases being claimed for the section 179 deduction. Here are some tips for qualifying for this important deduction, which can make a big difference in your tax filings this year.

Make sure property is eligible. To qualify for the section 179 deduction, your business property must fall under one of the following categories:

• Tangible personal property used for business (such as vehicles or equipment)
• Other tangible property used as an integral part of manufacturing, production or furnishing of services
• A research facility used in connection with business activities
• A facility used in connection with storage of business commodities
• Structures used for agricultural, livestock or horticultural structures
• Non-building storage facilities used in connection with petroleum production
• Off-the-shelf computer software
• Other qualified real property such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment and signs
• Qualified restaurant or retail property
• Livestock

Remember the deduction limit. As with most tax deductions, there is a limit for claiming deductions in section 179. According to IRS.gov, the total amount that can be deducted under section 179 is $500,000. After hitting the limit, businesses can claim a 50% bonus deduction on large purchases of new equipment because those items are depreciable.

For businesses taking advantage of the bonus deduction for the sake of showing losses (thereby lowering income and subsequently lowering taxes), the next question might go like this: “But what if I apply for a small business loan? If I show losses, no bank will touch me.” Here’s the best-kept secret in business financing: A bank loan is not the only way to get money for capital.

When an LA-based supplier of produce containers to Central Valley farmers paid cash for $1,012,000 of equipment before year’s end to take advantage of section 179 deductions, I worked with him to get 5.5% financing on a sale leaseback. He got the money he needed without the burdens of the bank, problem solved. I do this for Inland Empire business owners all the time as well. Creative financing is everywhere, with avenues that allow enterprises to get tax breaks and cash flow at the same time.

Deduct leasehold improvements. Don’t forget: If you lease a building that you have made improvements to yourself, those expenses can now be deducted under section 179. The limit on that deduction is $250,000, a threshold that most leaseholders should qualify for (as any major improvements exceeding that amount would typically fall in the hands of the building owner). For business owners that want the section 179 deduction next year but don’t have the capital to make building improvements, financing options are available.

By following these guidelines, business owners can find a clearer path to itemizing their section 179 deductions – and,a clearer path to securing funding for new purchases.

Jeff Brannon is managing partner of Solve Capital Group. He can be reached at (949) 356-6601, or by e-mail at [email protected].