From conversations with several business clients, the depreciation rules have gotten so complicated that
they just ignore them and leave it to us accountants to figure out. Each year there have been laws that
update, change, or sunset the thresholds and/or the expensable amounts. It’s very difficult to keep up
with the figures or why it matters. Head’s up, for those tax accountants reading this, this explanation
won’t appease your technical knowledge, it’s just an overview and doesn’t cover the nuances
Below is a basic overview of how the rules work and why these are special depreciation rules, meaning,
in order to get an expense deduction, appropriate purchases still have to be capitalized.
Recall the basic rule of items purchased that last more than 1 year, this hasn’t changed. In general,
these items must be capitalized. Meaning, they get listed on an asset schedule and the expense gets
spread over several years depending on IRS defined depreciable lives. For purposes of this ‘explanation
on how it works’ we’ll assume a company purchases a $500,000 piece of equipment. And we’ll assume
it gets depreciated (expensed on the P&L) over 5 years on a straight-line basis per ‘regular’ depreciation
rules, so $100,000 depreciation per year. Further, assume the business has total income of $20M and
total expenses of $19,800,000. Therefore, ignoring the new piece of equipment, the business has net
income of $200,000.
*One of the stipulations on Section 179 is that it can not create a loss for the business. Therefore, even
if the threshold for maximum Sec 179 deduction is $1M (which it currently is) it is limited. And no, it
doesn’t carry forward to the next year for the business. In the above example, only $200,000 Section
179 was taken, leaving $800,000 “on the table”. But this just goes away, it does not mean the next year
the company has $1,800,000 of Section 179 they can use. Next year they still just have the $1M
The above example seems pretty straight forward, however, we are talking about tax law here.
Therefore, there are a lot of caveats and considerations about how/when/amount of the above items.
The thresholds for if your company qualifies to use any of these special depreciation rules, what these
rules can be applied on, and the amount that is allowable has changed each year – sometimes
retroactively. For example, the amount of Section 179 deduction an individual taxpayer can take on
their personal tax return is limited. This was more of a problem in prior years, i.e. prior to 2008 Section
179 deduction was limited to $125K per taxpayer. Therefore, if a taxpayer had ownership in 3
companies that each took $100K, then although they received $300k of Section 179 deduction, they
were only allowed $125K on their tax return. Further, if an asset is sold prior to the ‘regular depreciable
life’ then it’s a deduction that has to be recaptured.
Section 179 has been changed by the following law changes (6 of which occurred at or after the end of
the year it impacted):
• ′Economic Stimulus Act of 2008′ (signed 02-13-2008)
• ′American Recovery and Reinvestment Act of 2009′ (signed 02-17-2009)
• ′Hiring Incentives to Restore Employment Act of 2010′ (signed 03-18-2010)
• ′Small Business Jobs and Credit Act of 2010′ (signed 09-27-2010)
• ′Tax Relief, Unemployment Insurance Reauthorization, Job Creation Act′ (signed 12-17-2010)
• ′The American Taxpayer Relief Act of 2012′ (signed 01-2-2013)
• ′The Tax Extenders Bill′ (signed 12-19-2014)
• ′The Protecting Americans from Tax Hikes Act of 2015′ (signed 12-17-2015)
• ′The Tax Cuts and Jobs Act′ (signed 12-22-2017)
The list of Section 168 (bonus depreciation) changes is nearly as extensive. Sometimes it has allowed a
50% deduction or 30% deduction, and currently it’s a 100% deduction (effective Sept 27, 2017). No, I
can’t explain why the TJCA retroactively created a 100% deduction effective 9/27/17 – but that’s what
the law is. You can see by the above why businesses like the depreciation acceleration provisions. It
allows the business to expense items in the current year when typical rules have the expense spread
over several years. However, it is also very important that you use a tax professional who understands
these rules to help your business plan for the year. Please note, this overview is not designed to be a
commercial for my profession, us accountant’s didn’t come up with these rules, we just have figure
them out. The complexity and constant changes frustrate us as well, because it makes it difficult to help
our clients plan or predict financial outcomes.
Has to be said, the above general information is not to be interpreted as specific tax advice
and before implementing any tax strategies, consult your own tax advisor.