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What is Section 179? (How Does Section 179 Work) (Example of using Section 179) - YouTube
Channel: Money and Life TV
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in this video we're gonna talk about
what section 179 is how it works and why
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it's important for you to know about it
if you have your own business make sure
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to watch this whole video from start to
finish because that's in this video I'll
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be showing you some examples on-screen
of how this deduction works and how you
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might be able to reduce your taxable
income what's up guys it's Mike and
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shepper if you're new this channel I
just want to take a moment and say
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welcome highly consider subscribing
because every single week on this
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channel I produce new videos that's
going to help you with your finances
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your taxes investments and things that's
gonna help you with your career and your
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everyday life okay guys today I'm going
to attempt something crazy which is to
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try to explain the section 179 deduction
in plain English and this video is
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actually requested by one of the
subscribers of this channel so Jeff! my
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brother is going to give you a big shout
out and say thank you for recommending
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this topic this is a very cool tax topic
to be talking about it's often very
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complicated but I'm going to try to
break it down into plain English
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obviously guys i can't take every
request that you guys give me but i felt
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that this was a really important tax
topic for you to know about especially
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if you own your own business or someday
you think you're thinking of starting
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your own business this can really help
you and if you're not an accountant i
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understand a lot of you who watch this
channel are not accountants so what you
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know why why should you even watch this
well if you really want to know some of
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the tax deductions business owners have
this is the one of the best ones to know
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about so to produce this video I had to
write a series of notes and good news
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guys in the description section down
below and also put it in the comment
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section down below I'm going to include
a link to the document I typed up that
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gives you a basic summary of the section
179 deduction and I've even included on
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that document a direct link to the IRS
Publication 946 and 179 in this video
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we're just going to cover the basics so
that you have a general basic
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understanding of what it is and why why
you would want to use it so let's start
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with why why do you want to use
section 179 well if you're a business
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owner or like I said maybe considering
becoming a business owner someday
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section 179 which is a tax deduction
will allow you to reduce your taxable
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business income and sometimes I've seen
it reduced people's taxable income in
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their business all the way to zero so at
the end of the year they paid no tax and
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it's completely legal okay so what is
section 179 section 179 is actually an
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election that allows you to accelerate
the depreciation on an asset and you're
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like what the heck I probably already
lost you guys or maybe lost most of you
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so every time I say the word
depreciation think of that as an expense
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and an expense in a business that's what
an expense reduces the taxable income of
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a business so when I say the word
depreciation think of an expense
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especially if you're not an accountant
that will help clear things up here
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and when I say eligible assets which I'm
gonna be using that term a lot in this
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video what I mean is that every business
hour most businesses they need machinery
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and equipment to run them so there's
things like they might need computers
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they might need software they might need
heavy machinery if they're a
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manufacturing facility right there's
gonna be land buildings other types of
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assets so just assets that we buy when
it's like equipment machinery that you
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can use to operate your business so in
general that's what we're talking about
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when I say the term eligible assets
you'll see as I progress through this
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video that accounting is like a separate
language so you so I'm gonna try to
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explain it in plain English along the
way and hopefully I haven't lost you
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already okay let's continue okay so
that's what section 179 is is it allows
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us to accelerate depreciation on an
asset which allows us to take a greater
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taxable expense deduction on our
business tax return so in general every
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the reason we're talking about 179 just
big picture big picture here guys and so
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that we can reduce our taxable income
and pay less tax so we keep more money
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in our pocket and that's the whole
reason we're talking about this now I
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will let you guys know that you cannot
use section 179 to drive your business
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income into a negative number you can
only reduce it to zero so keep that in
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mind guys as you're watching this video
I understand this stuff is May
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be confusing especially for not an
accountant but if you have questions or
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comments please leave them in the
comment section down below I'll make
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sure to get back to you but I'm also
going to really refer you to Alice well
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to that publication 941 by the IRS which
will answer many of your questions and
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really really gets technical if you need
or want that level of detail so who can
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take the 179 deduction people who own a
business and have purchased property
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that is used for business purposes so
when can you take the section 179
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deduction in your business when can you
take it you can take it as long as you
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have eligible assets things that would
qualify for that deduction and you use
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the section 179 deduction within that
tax year so the year you buy the asset
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is their year you have to use section
179 on that asset because once that year
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is gone you can no longer take it and
the asset will depreciate over time so
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what property qualifies for section 179
here are some examples machinery and
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equipment property contained in or
attached to a building other than
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structural components such as
refrigerators grocery store counters
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office equipment printing presses
testing equipment and signs gasoline
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storage tanks and pumps at retail
service stations livestock yes
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livestock like horses cattle hogs sheep
vehicles used in a business you can take
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section 179 up to a certain amount
usually it's up to $25,000 per vehicle
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however some vehicles vehicles that
weigh over 6,000 pounds you might be
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able to expense the entire thing in that
year with using section 179 if that
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vehicle qualifies there's all these
rules about different areas of business
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concerning section 179 so you just can
look at the publication if you have
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additional questions okay what are some
examples of property that would not
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qualify for the section 179 deduction
here are some right here assets
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purchased and placed in service that are
used to generate rental income so if
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you're a real estate investor you cannot
take 179 deduction no no you can that's
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one downside you still good to take
normal depreciation but you cannot
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accelerate it using the section 179
deduction other things you cannot take
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section once I mean
our thing like building land lease
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property there are some instances where
you can take section 7 179 and there are
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other instances where you cannot take
section 179 so you just need to look at
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the rules looking at the publication
just to see what applies in your
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situation are there limitations on
section 179 is there a limit to all this
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yes
currently the limit is $500,000 in each
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year in terms of how much section 179
your business can take but that's
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subject to change every single year it
always changes going you know from here
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and here you never know until Congress
passes the laws I'm sorry guys
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I totally messed up on the publication
number this whole time I've been
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shooting this darn video I've been
saying 1941 well the publication you
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want is IRS Publication 946 946 that's
the one you want you don't want 940 one
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but I have the link in the comment
section down below sorry about that ok
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let's continue ok so you may be
wondering well what if I can reduce my
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taxable income to zero using section 179
but does it carry over if I can't use it
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all the answer is yes whatever amount of
the section 179 you use that you know
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you obviously your income for your
business cannot go below zero that
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amount of section 179 will carry over to
the next year forum currently as the IRS
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code states for a non limited number of
years ok guys now we're gonna take a
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moment and take a look at a simple
example on screen I'm just gonna pull up
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an excel document and show you a picture
here I thought about using the
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whiteboard but I don't have the best
camera equipment here and it's gonna be
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much clearer if I can show you a
physical picture on screen so let's look
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at it right now so in this simple
example what we're looking at is a new
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computer so a new computer is purchased
on January 1st of 2017 and to simplify
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things I'm saying that this computer
cost $10,000 I know most computers don't
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cost $10,000 but in this example we're
using that number just for
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simplification purposes
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okay let's take a quick look at an
example of how depreciation would
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normally be calculated on this computer
without using section 179 at all by
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understanding this then you're gonna be
able to see how big of a difference it
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is later in the video so let's take a
quick look so I understand many of you
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aren't familiar with depreciation but so
every type of asset there is whether
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it's a computer building land has a
depreciable life and that depreciable
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life is assigned by the IRS so over here
in this little table in this little
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chart I've pulled this information from
the publication itself as you can see
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I've highlighted five years so for a
computer it has a 5-year depreciable
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life which means the IRS says the rule
state that we must expense the total
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cost of this computer over five years
and so that's what we're gonna do now
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over here in this calculation so let me
show you how that's calculated how we
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calculate normal depreciation without
using section 179 at all we bought our
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new spankin computer this is completely
awesome for $10,000 On January 1st of
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2017 we bought it for $10,000
depreciable life is five years we know
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that just because we just looked at that
chart we're gonna so five years
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obviously is 60 months of depreciation
we're in our first year here right so we
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bought our computer on January 1st and
during the course of the entire year
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we've taken now 12 months of
depreciation right because we've had the
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computer for one whole year so now we
have to calculate the depreciation
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expense over 12 months so what we do is
we take one full of year of depreciation
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which is 12 months and that so that
means we can depreciate 20% of the cost
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of that computer and the way I got 20%
in the first year is you just take
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there's two ways to look at it you can
do 12 divided by 60 total months because
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there's 60 months in five years or you
can just take one divided by five years
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in this case since we've had it for a
full year which probably that's the
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easier route so 20% is the amount we're
gonna appreciate in the first year so
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what we do is now we multiply 20% by the
total cost of of that computer
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so 20% times $10,000 gives us a 2000
dollar depreciation expense normal
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depreciation so each year if if we
weren't gonna use to 179 we would be
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able to deduct two thousand dollars of
depreciation expense each year up for
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five years on this computer so let's
apply a real-world example now with that
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so if we so knowing that our
depreciation expense in this case is
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only two thousand dollars if we had a
business as you can see on screen that
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made ten thousand dollars after all
normal expenses but you notice there is
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no depreciation expense yet now if we
add that depreciation expense it's going
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to reduce the taxable income of that
business by another two thousand dollars
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so instead of paying tax on ten thousand
dollars of taxable income because of
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depreciation now that business is only
gonna pay tax on eight thousand dollars
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of that income okay guys now let's look
at the same scenario but using section
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179 if we pull into play section 179
weekend we don't have to wait five years
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to recoup the cost of that computer we
can fully deduct the entire amount of
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the cost of the computer in that year so
instead of getting only a two thousand
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dollar deduction for a business we get a
ten thousand dollar depreciation expense
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deduction and so what happens is looking
at that same business now in this
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different scenario that business that
had ten thousand dollars in taxable
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income before depreciation expense now
we pull in this depreciation expense
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that we've used section 179 on we fully
depreciated the cost that computer all
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ten thousand dollars of it so we take
ten thousand dollars of income minus the
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additional 10,000 dollars in
depreciation expense and so for that
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year that business taxable income has
now gone to zero that business owner now
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has to pay zero tax on whatever income
they made in their business now remember
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guys that was just one example but let's
say you went and bought another computer
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for ten thousand well the the section
179 limit was what five hundred thousand
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right so you could expense that full
thing as
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well as long as you had enough taxable
income your business in order to deduct
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it because like I said you cannot use
section 179 to drive your business
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income below zero now are there any
downsides to taking section 179 and the
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answer is yes
one of the major downsides of expensing
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the entire thing using section 179 is
that section 179 would reduce the cost
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basis of your asset to zero so that
computer you bought you depreciated the
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whole darn thing so now your cost basis
goes to zero right so if you ever sell
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that computer whatever money you get or
receive let's say you sell that computer
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later on for $5,000 let's pretend you're
gonna have to report five thousand
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dollars in income on your business
because your cost basis is now zero
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because you have fully depreciated the
cost of that asset the second downside
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of using section 179 is you should be
thinking about where's your business
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income headed in the future if you
expense everything in the current year
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you have to ask yourself you know am I
gonna have any other deductions in the
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coming years when I have even more
income so you might have reasons not to
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take section 179 in the current year but
for the most part when I see in the real
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world is people usually do elect to use
most of their section 179 deduction all
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in the first year the thing I forgot to
mention guys is that you don't have to
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use all the section 179 deduction so you
do have discretion of how much of the
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section 179 deduction you want to use on
each asset okay guys that was a basic
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overview of how section 179 works where
do you go to learn more about this
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deduction well like I said go to IRS
Publication 946 I'll have links down
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below so make sure to check it out
there's over 100 pages of written
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information with tables graphs etc of
how the section 179 deduction works and
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how it might help you and your business
save a lot of money in tax alright guys
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I know this was a lot of her information
to take in especially if you are not an
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accountant so if anything did not make
sense let me know please by asking
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questions and comments because you know
it's hard to it's hard for me to explain
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this stuff so I might not have explained
it in a way that you understand that is
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completely fine so just drop any
questions comments down below and I will
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make sure to get back to you alright
guys if you liked the video make sure
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you smash that like button to let me
know
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like that share this information with a
friend especially somebody who owns
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their own business who's in accounting
or just trying to save money on tax and
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of course if you're not already
subscribed be sure to subscribe for a
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future weekly uploads because every
single week on this channel I do my best
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to produce new videos that are going to
help you improve your financial position
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your career and your life I love you
guys thank you so much for hanging out
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with me today and talking about tax
stuff and accounting stuff all this
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these crazy rules that are out there but
they are relevant and can save you a lot
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of money I love you guys I thank you so
much for your support on this channel
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and until next week I will see you in
the next video have a great week
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everybody love you all pase
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