What is Bonus Depreciation and Section 179 Depreciation?

As a business owner, you are likely familiar with the concept of depreciation. Depreciation is a tax-deductible expense that allows businesses to spread out the cost of purchasing and owning an asset over its useful life. This helps businesses save money on their taxes and manage cash flow. To further assist businesses in recouping the costs of large capital purchases, the IRS has introduced two powerful depreciation methods: bonus depreciation and Section 179 depreciation.

Bonus depreciation is a tax incentive that allows businesses to deduct a larger portion of the cost of qualifying assets in the year of purchase. It was introduced in the Tax Cuts and Jobs Act of 2017 and is set to expire in 2026. The current bonus depreciation rate is 100%, meaning a business can deduct the full cost of eligible assets in the year of purchase.

Section 179 depreciation is another powerful tax incentive that allows businesses to deduct the cost of certain property and equipment purchases in the year of purchase. The current Section 179 deduction limit is $1 million, with a phase-out threshold of $2.5 million. This means that businesses can deduct up to $1 million of qualifying assets in one year.

Bonus depreciation and Section 179 depreciation are great ways for businesses to save money on taxes and manage cash flow. They can be used in tandem to maximize the tax benefits of large capital purchases. However, it’s important to note that each has its own set of rules and requirements. Be sure to speak with a tax professional to determine which depreciation method is best for your business.

Disclaimer: The information provided above is not meant to
be legal or tax advise. You should consult your CPA and attorney to
determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider
specializing in cloud accounting.

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Defer Taxes with a Drop and Swap on Your 1031 Property

When all the partners don’t agree on what to do with the proceeds from the sale of real property, executing a “drop and swap” allows real estate investors to “drop” real property ownership from the LLC to individual partners as tenants in common (TIC) prior to selling the real property. The “drop” to individual partners as TIC should take place prior to the sale, allowing as much time as possible for the property to be “held for business or investment purposes” by the individual tenants. As with all 1031 exchanges, there is no clear rule in the tax code about how long before a sale the property must be owned by the tenants in common.

When the property is sold (the “swap”), the proceeds are divided among the TIC. Each individual can then decide whether to cash out and pay taxes or reinvest into another investment property and continue to defer taxes. 

Revenue Ruling 77-337 and Revenue Ruling 75-292 provide examples of exchanges that were disqualified due to transfers which occurred immediately before or after an exchange from or to an entity controlled by the taxpayer. 

Partners will want to ensure that the partners not involved in the 1031 Exchange (those that want to cash out) truly drop their interests in the partnership. If not, the IRS may recharacterize their TIC interests to partnership interests. Refer to Rev. Proc. 2002-22 for minimum “drop and swap” criteria. 

Be aware of two questions on the Form 1065, Schedule B:

Question 13 asks 

“…during the current or prior tax year, the partnership distributed any property received in a like-kind exchange or contributed such property to another entity (other than entities wholly-owned by the partnership throughout the tax year)”

 

Question 14 asks

 

 “At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property?”

 

It is best to negotiate and take title as individuals rather than entities.

 

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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SBA Economic Injury Disaster Loan Application Process

The U.S. Small Business Administration (SBA) has approved certain cities and states whose businesses have been negatively impacted by COVID-19 to be approved for the Economic Injury Disaster Loan.

On March 17th, Governor Greg Abbot requested emergency designation from the SBA Economic Injury Disaster Declaration to give access to the Economic Injury Disaster Loan program for the entire state of Texas. Abbot is estimating approval by next week. Small businesses can apply at: https://disasterloan.sba.gov/ela/.

The SBA has announced that the website is experiencing high volumes of traffic and slows down from 7:00 am to 7:00 pm. The best time to apply on the website is after peak hours from 7:00 pm to 7:00 am. It has been reported that some users are experiencing issues with Google Chrome. The SBA recommends using an alternate web browser like Microsoft Edge or Internet Explorer.

COVID-19: Economic Impact and Government Relief

With COVID-19 impacting the world economy, President Trump has made plans to help strengthen businesses. Small business loans will be available to eligible organizations negatively impacted by economic slowdown. The Small Business Administration (SBA) has been instructed to provide low-interest loans to help strengthen organizations negatively impacted by COVID-19. To receive an Economic Injury Disaster Loan (EIDL) from the SBA, the organization must be in a county who has been approved for an Economic Loss Declaration. Small businesses who receive the EIDL are set to accrue interest at 3.75% and nonprofits at 2.75% with repayment terms extending up to 30 years.

In addition to the Economic Injury Disaster Loan program, “[President Trump] will be instructing the Treasury Department to defer tax payments without interest or penalties for certain individuals and businesses negatively impacted.” This tax holiday will give businesses a 90 day grace period to pay 2020 Q1 ES payments.