Section 179 Deduction 2020 - YouTube

Hey what's up everybody. Today I'm going to  be talking a little bit about the Section 179  

depreciation deduction for small businesses.  And this was a request from one of my  

YouTube followers in the comments. It was a  great idea. I thought it was a good idea so  

I figured I'd do a video on it. And so today I'm  going to be talking about what is the Section 179  

deduction. How it works, some other considerations  that you have to think about, and also we're going  

to be talking about cars. You know just because I  like cars but really because there's some special  

ruling around depreciating cars under this section  of the internal revenue code. Alright so what  

is a Section 179 deduction? So Section 179 is  a section, a code in the internal revenue code  

that basically allows small business owners to  accelerate their depreciation of fixed assets.  

So a fixed asset is this - a large or  expensive asset that's supposed to last you for  

several years okay. Like a expensive desk, or  equipment, or machinery, or a vehicle. You know,  

those kinds of things. And so normally when you  buy these fixed assets you have to depreciate  

them over their useful life. So for example  like office furniture, like you buy a desk,  

you depreciate the cost of that desk over  seven years. So you buy it for let's say $700,  

or actually that's a pretty cheap desk, let's  say $7,000 desk okay. And so over seven years,  

using the straight line depreciation method you  would take a $1,000 deduction every year. And then  

and after seven years you get no more deduction.  So what Section 179 does is that it allows small  

businesses to depreciate the full cost of the  asset in the first year that you purchased and  

placed it in service okay. So that's huge. So that  $7,000 desk now you get to take a $7,000 deduction  

in the year that you buy it and put it to put  it to use okay. So how does it work? First you  

have to purchase qualified property, which is  basically any asset that you can, any tangible  

asset that you can buy that is not real estate,  not land, or most improvements that you make to  

a residential home does not qualify okay. So  it can be machinery, equipment, computers,  

farm equipment, vehicles, furniture, those kinds  of things. So when you purchase it you have to  

place it in service which means you use it in  the year that you bought it okay. Because there  

are times where you can maybe stock up on laptops  in your company and you don't put them in service  

because you just have a bunch on deck you know,  maybe for when you hire employees or something,  

you can just grab one from your from your laptop  inventory okay. But in this case, you had to  

purchase the asset and then place it in service  in the same year in order for it to qualify. When  

I said earlier this is for small businesses that's  because there are some limitations on how much you  

can deduct and how much assets you can buy before  the deduction starts phasing out. So here, I'll  

show you here. The maximum deduction per year at  least for 2020 is $100,040,000 okay. And so that  

amount starts to phase out once you purchase more  than $200,540,000 worth of equipment or assets  

okay. And that completely phases out once you  purchase more than $300,630,000 of assets. But  

there is something else that you could go  after and that's called bonus depreciation.  

So bonus depreciation thanks to the Trump tax law,  allows you to take 100% depreciation on any assets  

that you purchase and use in that same year. You  know, same rules except for real estate, land, and  

most residential improvements. So basically  you take Section 179 deduction first  

and if you still have assets that are not fully  depreciated, then you have the option to take a  

bonus depreciation after that and fully depreciate  all your assets that way okay. So there's no real  

limitations to the bonus depreciation. There  are some differences on how they're treated  

when it comes to losses. You know if your business  makes a net loss rather than the net income,  

a bonus depreciation will allow you to bring your  business to a loss while Section 179 deduction  

does not let you bring your business to a  loss. It will stop at zero and you carry that  

deduction over to the following  year while the bonus depreciation  

will bring your business to a loss and you can  therefore carry that loss to the following year.  

Or carry loss, or carry that loss backwards  alright. So there are some considerations  

for this deduction because you know I see a lot  of videos and people talking about you know buying  

a car under your business and you can write the  whole thing off immediately using Section 179 and  

bonus depreciation okay. And so yeah, that's true,  you can do that and I'll talk about that after  

this, about what kind of cars qualify and all that  but here are some considerations. If you purchase  

a car for your business and you depreciate it  fully in the first year then, now the book value  

of your car is zero okay. I know your market value  is still you know whatever the actual market value  

is but your book value for the car is zero. That  means if you decide to sell your car in two years,  

three years, even like five years you have to  recapture that depreciation as income okay. So  

here's the difference, if you buy a car for  $50,000 and you depreciate it down to zero okay,  

if you sell the car in two years for  $40,000 then you have a $40,000 income  

because you because you fully depreciated the car  okay. Now if you bought the car for $50,000 and  

you took normal depreciation on it, which you  have the option to do, and you, let's say you  

depreciate it over five years $10,000 per year. So  after two years your book value would be $30,000  

and you sold it for $40,000, then your your  gain, your income would only be $10,000  

okay. So there's some differences there and  those are things that you have to consider.  

You know if you plan on keeping the asset for  a long time then it's probably best to take the  

Section 179 deduction. If you plan on selling  it soon then I would really think about that  

you know, I know that the tax savings could be  a benefit. You know the tax savings immediately  

could be better for you than to depreciate it once  every year okay. You know time value of money, and  

all that. And also once you skip the Section 179  deduction, let's say you skip it the first year,  

you can't take it anymore after that  because remember the asset has to be  

purchased and placed in service in that year for  you to take the Section 179 deduction. If you skip  

it the first year then you got to keep going with  normal depreciation. Now let's talk about cars.  

Cars there are strange rules for cars  because I think the IRS wanted to close  

as many loopholes as possible for cars but there's  still strange rules. So any vehicle that's like  

truly a commercial vehicle will qualify for the  Section 179 deduction. And what I mean by a truly  

commercial vehicle is like a bus or like a cargo  van you know. They define it as something like a  

vehicle with like two seats, and then like a cargo  barrier, and then like cargo in the back, and no  

seats in the back. Or a bus you know, something, a  vehicle with more than like eight rows of seating  

that would be a bus you know. So any legitimate  commercial vehicle those would qualify. But we're  

talking about normal passenger vehicles like the  people are talking about when they say you can buy  

a car into your business and write off the entire  thing. We're going to be talking about passenger  

vehicles okay. In order for a passenger vehicle  to even qualify for any Section 179 deduction,  

the vehicle has to weigh more than 6,000  pounds, the gross vehicle weight rating  

by the manufacturer has to be greater than  6,000 pounds okay. That's the first criteria  

and actually that's the only criteria.  So if your vehicle meets that criteria  

then you get a maximum $25,000 Section 179  deduction okay in your first year. And remember  

if your vehicle is worth more than that  then you can take the bonus depreciation.  

The bonus depreciation for vehicles has the same  kind of weird rule of the 6,000 pound rule okay.  

So if your vehicle qualifies you get a $25,000  Section 179 deduction and then the rest will be  

bonus depreciation. So I'll give you an example  for that right here. So let's say you buy  

a 2021 BMW x5 for $75,000 okay. The GVWR,  the gross vehicle weight rating on that  

car is 6,559 pounds, which means it meets the  criteria okay. So you bought it this year. In 2020  

you can take the Section 179 deduction of $25,000  and then you can take the bonus depreciation of  

$50,000 and you, so then you've totally  depreciated the car. $75,000 in this year.  

In that sense you've essentially written off the  entire cost of the car. Which is good news for  

you unless you plan on selling it in a couple  years then, then you know, you're going to be  

hit with a large tax bill after that. But if you  plan on keeping the car, then good news okay. So  

I think that's all I've got for today. If there's  anything else that I missed, or anything else you  

want to know, just leave me those questions in  the comments below. And also if you're new here,  

please do me a favor subscribe to my channel. I'm  going to be talking a lot about tax, business and  

Covid stuff. Keep you all, keep you all updated on  that. And also smash that like button if you found  

the content of this video enjoyable and helpful.  And share this video with your friends, anybody  

who think you might find it useful okay. That's  all I've got. Thanks for joining me and take care.