Take Advantage of Deductions for Business Investments

The U.S. tax code generally encourages investments made to strengthen or grow a business. In 2018, the Tax Cuts and Jobs Act (TCJA) made it possible to write off the full cost of large asset purchases in the first year with Section 179 deductions and/or bonus depreciation. This includes eligible vehicles, up to certain limits.

In March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded the deduction available to businesses that invest in qualified improvement property. This tax benefit may be important for companies that had to reconfigure office or retail space, remodel restaurant dining areas, or make other improvements for coronavirus safety reasons in 2020.

Your tax professional can help you determine which of your investments might be eligible for Section 179 expensing, bonus depreciation, or both.


Stacking Tax Breaks

When applying these provisions, Section 179 is generally taken first. 2020 equipment purchase is $2 million. Section 179 deduction $1,040,000. Bonus depreciation deduction $960K. $640K estimated tax savings.

Cost of equipment purchased in 2020                                        $2,000,000   
Section 179 deduction                                                                  $1,040,000   
Bonus depreciation deduction                                                       $960,000   
Estimated tax savings (based on 32% tax bracket)                      $640,000

*The maximum Section 179 amount for 2021 is $1.05 million, with a phaseout threshold of $2.62 million.   


Bonus Depreciation

A deduction for depreciation may be taken on business assets that will become obsolete or wear out over time, such as business vehicles, machinery, computers, and furniture. The cost is capitalized over a set period of years according to the modified accelerated cost recovery system.

To incentivize business spending, the TCJA allows 100% first-year bonus depreciation for qualifying new and used assets acquired and placed in service between September 28, 2017, and December 31, 2022. Used assets must be new to the taxpayer.

Section 179 Expenses

Under IRC Section 179, small businesses may elect to expense the cost of qualifying property purchased and put in use during the current tax year, rather than recovering the costs over time through depreciation deductions. In general, qualifying property is defined as depreciable tangible personal property that is used for business purposes more than 50% of the time.

In 2020, the maximum amount that can be expensed is $1,040,000, and the deduction phases out when property placed in service exceeds $2,590,000.

QIP Fix

Qualified improvement property (QIP) is a new classification created by the Tax Cuts and Jobs Act that consolidated and replaced three previous classifications: qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property. QIP includes many types of nonstructural improvements made by the taxpayer to the interior of a nonresidential building after the building itself is placed in service, such as drywall, ceilings, interior doors, mechanical, electrical, and plumbing.

A drafting error (dubbed “the retail glitch”) set the depreciation recovery period for QIP at 39 years. The CARES Act shortened the recovery period to 15 years and made QIP investments eligible for 100% first-year bonus depreciation. This change was retroactive, so businesses can benefit from the same favorable tax treatment — or possibly get a refund — for qualifying improvements made in 2018 and 2019.

Wells Fargo Advisors - Wealth Management & Financial Advisors
975 OAK ST, SUITE 1080 Eugene, OR 97401
Phone: (877) 778-9508

Wells Fargo Advisors does not render legal, accounting, or tax advice. Please consult your tax or legal advisors before taking any action that may have tax consequences. Wells Fargo Advisors did not assist in the preparation of this material, and its accuracy and completeness are not guaranteed.

This information is intended for use only by residents of (AK, AL, AR, AZ, CA, CO, CT, DE, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, MI, MN, MO, MS, MT, NC, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA, WV, WY). Securities-related services may not be provided to individuals residing in any state not listed above.

For parties residing outside of the U.S., this information is: (i) provided for informational purposes only, (ii) not and should not be construed in any manner as an offer to participate in any investment or to buy or sell any securities or related financial instruments, and (iii) not and should not be construed in any manner as a public offering of any financial services, securities or related financial instruments.

Products and services listed may not be available, or may have restrictions, depending on client country of residence.

Investment and Insurance Products Are:
  • Not Insured by the FDIC or any Federal Government Agency
  • Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
  • Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested

Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC

A note about Social Media: Opinions, comments and actions taken on Social Media are those of the third party and do not necessarily reflect the views of the creator of this profile or of the firm. Social Media is intended for U.S. residents only and subject to the following terms: wellsfargoadvisors.com/social.

Links to third-party websites are provided for your convenience and information purposes only. Wells Fargo Advisors is not responsible for the information contained on third party websites.

©2021 Wells Fargo Clearing Services, LLC. All rights reserved.

FINRA’s BrokerCheck Obtain more information about our firm and its financial professionals
FINRA’s BrokerCheck Obtain more information about our firm and its financial professionals