Part of the reason for the development of Section 179 was to help small businesses grow by allowing them to make deductions from property in the first year of purchasing it, instead of having to make small deductions over multiple years. Depreciable items such as business equipment and real property qualify for Section 179 deductions. Keep reading to learn the qualifications for eligible real property and how you can save lots of money on these investments.
Real property deductions from Section 179
Although Section 179 of the IRS Tax Code is known mostly for deductions that businesses can take on new equipment, there are also lots of real property incentives in this tax code. There is a $500,000 annual limit on the amount of deductions you can claim.
Certain types of real property can qualify for Section 179 deductions; however, the deductions claimed cannot exceed $250,000 of the annual limit of $500,000.
Another number you want to pay attention to is the limit on your business’s total investments in one year in order to qualify for a Section 179 deduction. A business’s total investments cannot exceed $2 million annually. If it does, the deductions will decrease dollar by dollar. This was put in place by Congress in 2015 — the motive being that the purpose of the Section 179 tax code is to help small businesses grow.
Eligible real property
The limited types of real property that are eligible for Section 179 deductions are:
- Improvements made to leasehold properties: Improvements made to nonresidential, real property can take advantage of Section 179. This does not include improvements made by a lessor.
- Restaurant properties: The purchase of a building or improvements made to a building completed within the tax year can be deducted, but 50 percent of the square footage must be devoted to meal preparation, seating and/or consumption of meals prepared on the premises.
Qualified retail improvement property: Generally, this is any improvement to an interior portion of nonresidential real property, according to the IRS. But it must meet multiple requirements: The portion is open to the general public and is used to sell tangible property to the general public. The improvement is placed in service more than 3 years after the date the building was first placed in service. Finally, the expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building.
Land improvements generally do not qualify for Section 179 deductions. Land improvements are items such as parking lots, swimming pools and bridges.
Business income limitation
Another financial limitation on businesses claiming Section 179 deductions is that the business cannot claim more in one year than its net taxable business income in that year. For example, if your business has a net loss for a given year, you cannot take a Section 179 deduction. If your net taxable income is less than the total amount of deductions you wish to make, you can claim only deductions that do not exceed your income. However, you have the option of carrying over costs into the next year that could not be deducted in the current one.
Tip: Calculate your taxable income by subtracting your business deductions from your business income.
To learn more about how you can reap the benefits of Section 179 deductions on your commercial property, give us a call today. Contact an MCB Advisor at 703-218-3600 or click here. To review our real estate articles, click here. To review our tax news articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.