The lowering of the corporate tax rate was one of the biggest highlights to the Tax Cuts and Jobs Act of 2017 (TCJA), but far from the only takeaway for businesses. Look closer at the reforms, and a near doubling of the Section 179 tax deduction could prove as advantageous for companies as a lower overall rate.
Why? Because Section 179 allows businesses to fully deduct qualified purchases and expenses in their first year of tax service, allowing organizations like auto dealers to improve their operations immediately. Instead of deducting little by little through depreciation, dealerships can write off an entirely new piece of machinery, customer relationship management software solution or security system under the Section 179 tax deduction. The tax code can provide powerful leverage to dealerships, but they must know how to use it.
What is the Section 179 tax deduction?
Section 179 provides businesses with a way to deduct capital expenses on qualified business or personal property bought and placed into service that tax year. Some of the items covered by the deduction include financed new or used business equipment, computers, off-the-shelf software, office furniture and equipment, and certain real property. Vehicles are a popular deduction under Section 179, but auto dealers be aware, those cars have to be for business use, not inventory.
Still, the Section 179 tax deduction is highly useful for dealerships, and the TCJA made it even more so. The total allowable deduction in 2017 was $510,000, but in 2018 that limit jumps to $1 million. The reforms also opened up the possibility to deduct nonresidential property improvements under Section 179. The cap hike is permanent and will be indexed to inflation in future years.
One thing to note, however, is that the deduction begins to phase out at $2.5 million of qualified expenses. For every dollar after that, the $1 million allowable deduction is reduced in kind, meaning the deduction is negated at $3.5 million of purchases. The phase-out cap was also raised by the TCJA.
How dealerships can leverage the Section 179 tax deduction
Auto dealerships have a range of options when it comes to leveraging the Section 179 tax deduction. Thanks to increased flexibility in qualified expensing and the new maximum allowable deduction, these businesses can utilize the Section 179 tax deduction throughout operations. Section 179 deductions can allow dealers to:
- Upgrade shop equipment: Auto repair is often a major part of dealer operations, meaning shop equipment is regularly and thoroughly used. Such high levels of use can lead to costly repairs, and maintenance only prolongs the inevitable. These repeated fixes eventually become less and less cost-effective than financing a new or used purchase. Dealers can leverage Section 179 in such situations to upgrade their critical machinery, as well as generate tax savings.
- Install new car lot alarms or showroom HVAC units: Nonresidential property improvements now covered by the Section 179 deduction include roofing, heating, HVAC, security and fire protection improvements. The allowance for nonstructural renovations means dealers can invest in new alarm or security systems or opt to enhance ventilation in the main building.
- Purchase brand-name software: Software is as important a business asset as any these days. The Section 179 deduction reflects that, allowing businesses to expense off-the-shelf solutions. While the costs of proprietary platforms aren't covered, businesses can buy any one of the several brand-name accounting, CRM or sales solutions on the market today and deduct its cost.
How to take full advantage of Section 179
With decades of experience in providing financial assistance to auto dealers, Comerica Bank knows the unique needs these businesses face. As the Leading Bank for Business1, Comerica Bank can help auto dealers navigate the Section 179 tax deduction and strategize accordingly, as well as finance inventory, acquisitions and real estate. Contact us today for more information about how dealerships can benefit from our full banking services.
1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, compliance or accounting advice. You should consult your own tax, legal, compliance and accounting advisors before engaging in any transaction.