In our last blog entitled “Understanding Equipment Tax Depreciation Benefits,” we explained how the U.S. tax code allows tax deductions for depreciation that can help restaurants save money. While that blog primarily examined depreciation in general under the IRS “Modified Accelerated Cost Recovery System” (MACRS), this blog will take a closer look at depreciation under MACRS’ Section 179 deduction. And while all depreciation deductions under MACRS provide potential cost savings for restaurants, Section 179 is the most advantageous, especially for restaurants that lease their equipment.
What is the Section 179 Deduction?
First enacted by Congress in 1958 as an economic stimulus, Section 179 allows businesses to deduct the FULL purchase or lease price of qualifying equipment during the tax year. This differs from the standard MACRS depreciation deduction, which allows capitalized costs of property to be recovered over its recognized useful life via annual deductions for depreciation. Section 179 works by allowing businesses to treat the purchased or leased property as an expense, rather than requiring its cost to be capitalized and depreciated. Thus, a restaurant can use Section 179 to deduct the full purchase or lease price from the operation’s gross income.
In short, while a restaurant might be able to save the same amount spread out over several years by depreciating equipment under MACRS, Section 179 provides for a one-time savings. This can prove to be especially beneficial to start-up restaurants, but, as with all tax situations, restaurant owners should consult with a qualified accountant to determine the best option for their particular operation and tax situation.
Section 179 Deduction and Equipment Leasing
The biggest bang for a restaurant’s buck with Section 179 comes from equipment leasing. This is because businesses can deduct the full cost of the leased equipment, while only making payments that cover a portion of the full cost. In fact, the amount saved in taxes usually exceeds the amount of that year’s lease payments. Little doubt that this should be especially appealing to a restaurant trying to make it through that first tough year. Savings can be enhanced by non-tax capital leases, such as a “10% Purchase Upon Termination” agreement, which allows companies to make smaller payments but still take full advantage of Section 179. Whatever the lease, make sure that the finance agreement is properly structured to work with Section 179.
Section 179 and the Current Tax Year
As pointed out in the previous blog, Section 179 represents a “Win-Win” for both businesses and the government. Small businesses get a significant tax break that encourages equipment purchases and leases, which then helps them expand profits, leading to more tax dollars for Uncle Sam. Of course, as the government wants to ensure that its portion of the “Win” isn’t compromised, Section 179 tends to undergo tweaking every year or so.
The 2017 Section 2017 deduction limit is $500,000 for new and used equipment either purchased or leased during the calendar year. There is a $2 million spending cap on equipment purchases and leases, which means that every dollar spent over this amount reduces in equal measure the amount of the $500,000 limit. So, a business spending $2.5 million on equipment during the year will not receive the deduction at all under Section 179. However, a business exceeding the spending cap can apply the 2017 allowable 50% “bonus” depreciation on qualified (must be new, among other stipulations) equipment purchases that exceed the cap. Of course, the spending cap will not likely impact most restaurants.
Congress Makes $500,000 Deduction Limit Permanent
The $500,000 deduction limit was recently made permanent via the Protecting Americans from Tax Hikes Act of 2015 (PATH). Prior to PATH, the limit could be changed by Congress at will, and was as low as $250,000 in 2009. This action makes year-to-year Section 179 accounting easier, as prior to PATH businesses could not predict the limit, or even be certain that it would be offered in a given year.
Of Note to Restaurants Enjoying a Highly Profitable Year
When considering the benefits of applying for a Section 179 deduction, note that the deduction cannot exceed the aggregate income earned by the business in a given year. Thus, if a restaurant nets $125,000 during the year, the Section 179 deduction cannot exceed this amount. However, Section 179 deduction amounts not allowed in a given year for this reason, can be carried over to the next year.
Capital versus Operating Depreciation
Look forward to another blog, where we will dig even deeper into the tax implications of depreciation with a look at the differences between capital versus operating deprecation.
Finally, please note that the above information does not constitute “tax advice,” but is simply an informative blog drafted in order to alert you of potential savings for restaurants within the tax code. Be sure to conduct due diligence by discussing your restaurant’s tax situation with a qualified accountant.Pages: