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Good News for Business – §179 Deduction in 2016 And Managing Fixed Assets

 

Most people think the Section 179 deduction is some mysterious or complicated tax code. Apart from the fact that the Government treats it like a light switch, turning it on and off and dimming it and brightening it according to the wishes of the powers that be, it really isn't all that complicated.

Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.

When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).

Now, while it's true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.

In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting over the next few years. That's the whole purpose behind Section 179 - to motivate the American economy (and your business) to move in a positive direction. For most small businesses, the entire cost can be written-off on the 2016 tax return (up to $500,000). In arriving at the $500,000 deduction the rules state that the deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2016, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2016.

Section 179 does come with limits - there are caps to the total amount written off ($500,000 for 2016), and limits to the total amount of the equipment purchased ($2,000,000 in 2016). The deduction begins to phase out dollar-for-dollar after $2,000,000 is spent by a given business, so this makes it a true small and medium-sized business deduction.

Bonus depreciation is offered some years, and some years it isn't. Right now in 2016, it's being offered at 50%. The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only. Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,000,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.

When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.

It gets a little sticky when it comes to vehicles and other equipment not used 100% for business.  If you remember, several years back it was referred to as the “Hummer loophole.)  They closed the loophole and now require that such equipment be used more than 50% for business, and that the percentage business use applied to the cost and only that amount qualifies for Section 179 Treatment.

Never forget, QuickBooks Enterprise comes with Fixed Asset Manager to handle you depreciation calculations.  In addition it helps you manage varying aspects of your fixed assets.

The Release Notes for QuickBooks Fixed Asset Manager, Tax Year 2016 include:

Federal cost recovery provisions in the Protecting Americans From Tax Hikes (PATH) Act of 2015

  • Bonus Depreciation:
    • 50% for property placed in service through 2017 (including $8,000 additional first-year depreciation on luxury autos and trucks)
    • "Qualified Improvement Property" (as defined in the Act, that is MACRS nonresidential real property) placed in service starting in 2016 is eligible for bonus depreciation
  • Section 179 limits and eligible property made permanent:
    • Deduction and investment limits of $500,000 and $2,010,000
    • Section 179 deduction on Qualified Retail, Qualified Restaurant, and Qualified Leasehold Improvement Property
    • Section 179 deduction on computer software
  • 15 year recovery period made permanent on Qualified Retail, Qualified Restaurant, and Qualified Leasehold Improvement Property

The screen below shows the Fixed Asset Item information available. You can use custom fields to capture other desired information.  If you want to monitor maintenance costs, you can set up a service item linked to the asset item with the appropriate expense account mapping and code R&M expenditures there and run reports on the service items showing ongoing maintenance costs.

When acquiring equipment, make sure you set up the fixed asset item mapping it to the appropriate fixed asset account code and don’t just record the purchase to the asset GL account.

To open the Fixed Asset Manager, go to the Company menu and click Manage Fixed Assets. Here is a screen shot of the Fixed Asset Manager listing all assets:

Here are some of the features the Fixed Asset Manager offers:

·         Tight integration with QuickBooks data.

·         A detailed, customizable asset entry screen.

·         Six depreciation bases (Book, State, Federal, Other, AMT, ACE).

·         Projected depreciation calculations.

·         Disposition tracking.

·         Custom queries and sorting.

·         Full calculation overrides.

·         A wide variety of built-in depreciation reports and forms.

·         Multiple ways to export and import data.

·         Integration with ProSeries Tax products.

In addition to synchronizing data with QuickBooks, the Fixed Asset Manager has its own data files that can hold more detailed asset information than a company (QBW) file can hold.

This client has approximately $50,000,000 in Property and Equipment, so having Fixed Asset Manager is important.  They can review, run reports, make corrections much easier, run projections and because they have set up custom service items linked to the fixed assets, use the data to Really Manage their fixed assets.

Here is a close up look at an individual fixed asset in FAM. You will note that the input form captures personal property tax data.  In addition, it is obvious that this asset entry is incomplete.  Note the mapping to accumulated depreciation and depreciation expense is incomplete.

We hope we have provided you with valuable information for your 2016 tax return and opened your eyes to a tool you might already have in hand.  If you need help in implementing, contact us. 

 

 

Section 179 Source:  IRS.gov

 

 

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