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Hey, everybody, and welcome back to the Teaching Tax Flow podcast episode 162. We are gonna dive into the section 179 deduction. So if you don't know what it is, hang tight. You're about to find out. But not before a brief, brief moment to thank our episode sponsor.
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John Tripolsky:Alright, everyone. You're back here again on the teaching tax flow podcast as you heard here in the beginning. So we're gonna look at that section one seventy nine. So sure you've probably heard this thing or maybe you haven't, but you're about to. Actually, you just did, so you're about to hear what it is.
John Tripolsky:And this is one of those things where I don't know if there's a lot of confusion around it or if there's just people know what it is, but, you know, they they don't I wouldn't say they don't really care. They think it might not apply to them. So trust me, you don't wanna hear it from me. Even though I have more hair on my chin than my cohost has on his head, that does not mean that I have more knowledge. He's way smarter and better looking.
John Tripolsky:So Chris Pacquero, welcome back, man. Let's let's dive into this one.
Chris Picciurro, CPA:Excited to dive in. I talk about section one seventy nine. I just came off a grueling two week road trip recently teaching tax season updates for the National Association of Tax Professionals. You know, the I love meeting with tax professionals all over the country, John. I got to talk to go to Boise, Idaho.
Chris Picciurro, CPA:Where did I where did I go to? Denver, Colorado. Got to teach right here in the gorgeous state of Tennessee, and my favorite tax season update location. I've done this for three years. Albuquerque, New Mexico.
Chris Picciurro, CPA:Believe it or not, that has been my favorite place over the last few years. Awesome people. We actually have a fellow tax professional that lives there, so I was able to catch up with him. Why am I talking about all this globetrotting? Because in the globetrotting, I kind of came up with this this way of explaining section one seventy nine to tax professionals, and I think we can all understand it.
Chris Picciurro, CPA:It's the cousin of bonus depreciation. So bonus depreciation, we have some content on that. When you buy a eligible fixed asset, a business gets an immediate tax deduction, but you have to elect out of it. So you just get it if you like it or not or like out of it. Section one seventy nine, you if you have eligible property, you can get it, but you have to elect into it.
Chris Picciurro, CPA:So you've gotta raise your hand and say, hey. I want section one seventy nine. Now section one seventy nine and bonus appreciation can can be used in concert together. So, we're gonna dive into what that is because a lot of times people are talking about section one seventy nine and they have no idea what the heck they're talking about or they they don't know half the time they don't know what they're talking about but they don't realize they're talking about it. So, like, John, section two eighty AG.
Chris Picciurro, CPA:Oh, the Augusta rule. So, are talk, well, can I rent this? You know, I I I can't I rent my house for my business so my dog could, you know, do that like, no, no, no, don't misapply. Ideas are cheap, implementation's valuable. So, a lot of people in Teaching Taxes Sold community, thank you to everyone in the Defeating Taxes private Facebook group.
Chris Picciurro, CPA:You are the really driver in a lot of these topics. And so they'll say, hey. If I buy a new vehicle, if I buy a piece of machinery, do I get a deduction? So let's dive in section one seventy nine. Now this has been around for a long time.
Chris Picciurro, CPA:As long as I've been practicing, so over twenty years. However, well, one big beautiful bill act, as we've come to know and love it, Obi three. I always said about, you know, in teaching those classes, if because I'm a big Star Wars lover, so I like Obi three. You know, we got Obi Wan, Kenobi, and c three PO. If they had a baby, oh, that wouldn't be prettier, John.
Chris Picciurro, CPA:But it would be called Obi three.
John Tripolsky:You know what's awesome, though? It's like, you know, we kinda jokingly talk about that as, you know, it's the cousin of bonus. But I think that's a great way to explain it. Right? And I would say this to anybody that I mean, and this is gonna come out wrong, but I'm gonna say it anyway.
John Tripolsky:So just knowing that it's gonna happen. I think the assumption that people are kind of I'd say that they they kind of, inherit, maybe is the word, as a as a taxpayer and that you have a tax person, I am using the air quotes person, doing things for them. You know, I think we just kinda say, oh, well, you know, they got this. But I'm glad that you mentioned that that some things, case in point, you have to opt in, opt out of. It just doesn't automatically happen.
John Tripolsky:Right? Like, if if you're doing your own, like, say, you go the DIY route, you think, again, air quotes, you have a simple tax return because we know that doesn't exist. The IRS is never gonna call you, right, and say, oh, you missed this. You may want to elect for the or elect out of. It's never gonna happen.
John Tripolsky:So we talk about complexity. This is a perfect, perfect scenario where you really have to know what plays with what and how and opt in, opt outs, all of that. Right?
Chris Picciurro, CPA:Right. And and the nice thing with section one seventy nine now, let's bonus depreciation, you get it or you can elect out of it by asset class, but you that's it's an all or nothing proposition. With one seventy nine, you can elect into it, and you can elect into it for the exact dollar amount that you want. So it's almost like PLAY DOW. Right?
Chris Picciurro, CPA:It's a Play Doh deduction. You can mold it into what you want. Sometimes you don't wanna take all of it. Sometimes you wanna leave some for for later. So, yeah, section one seventy nine, it allows businesses to immediately expense qualifying property in the year it's placed into service.
Chris Picciurro, CPA:Now that's very important taxpayers, especially as we roll into this end of year. If, John, you bought a piece of equipment, let's say you were back doing your general contracting stuff, woodworking and that sort of stuff, and you said, man, I really need a new lathe. Okay, you go put down a $10,000 deposit, but you don't take delivery of the lathe until January 13. That is not placed into service until the next year. So, you haven't put, just because you put a deposit on a vehicle, a piece of equipment doesn't mean you placed it in the service.
Chris Picciurro, CPA:Placed it in the service means it is being used and available and that's a very important distinction.
John Tripolsky:It I think I'm more impressed that you know what the heck a
Chris Picciurro, CPA:lay this, sir. I did not know this about you. Up that we had to take home economics in middle school and shop. So we had I was in
John Tripolsky:shop classes. Careful. They need to bring that back
Chris Picciurro, CPA:as a
John Tripolsky:as a matter of fact. They if yeah. I mean, who cares if you're missing a couple fingers by the time you graduate? It builds character.
Chris Picciurro, CPA:Oh god. Yeah. I I think our shop teacher, the guy whose name was mister Mitch. I think he he almost had a stroke every time we broke off the sander. You know, you hit that butt.
Chris Picciurro, CPA:It was like it was like going to the grocery store when you have the conveyor belt that So But, anyway so yeah. So I
John Tripolsky:mean and and back to this. So you bring up another really, really good point. Right? So and and, you know, obviously, we're both from the Detroit area. Right?
John Tripolsky:So and and I think automakers and dealerships do a really good job of this. Right? Because they're not really pushing year end to come buy a car. They're doing preholiday stuff. Because if they don't have it on the lot, you can order the darn thing.
John Tripolsky:You could put the deposit on it, but until that sucker's rolling down the rolling down the road with your temp tag or your license plate on it, it's it's not yours, frankly. So it doesn't matter. And I don't know where I heard this one. Right? And it might I wouldn't even say who it is because I can't remember.
John Tripolsky:It has somebody with, like, purchasing a jet. I mean, the extreme. Right? And they're like, nope. I need it this year.
John Tripolsky:Well, as you know, you're not gonna go to most jet manufacturers. And they say, oh, yeah. Take this one off the lot. Here you go. It's December 15.
John Tripolsky:So you mentioned that with equipment, and that's a great example. Right? Something that even if you're using it in, like cars, trucks, what are some of the other things that the supplies do? Is there anything that you guys see a lot in the private practice world?
Chris Picciurro, CPA:Yeah. So well, it is a the section one seventy nine is designed to incentivize small to medium sized businesses to buy capital assets. Before we dive in and what are the eligible asset types, I wanna remind people, one of the three laws of teaching tax flow is that cash flow and tax flow are different items. So if you buy that lathe, John, if you pay cash for the whole thing or you finance 99% of it, the deduction is the same. The depreciation schedule is the same.
Chris Picciurro, CPA:So there is a big distinction and that's something that could be very confusing. So let's move into the maximum deduction. Then we're gonna talk about eligible property. Perfect. With OB three, the maximum section one seventy nine deduction was raised to $2,500,000.
Chris Picciurro, CPA:So it's a huge amount of immediate deduction a business can take. And here's the nice thing. It's indexed for inflation. So it's on Santa's good list. Sometimes we get these things that are not indexed for inflation.
Chris Picciurro, CPA:I'll give you an example. Capital loss carryforward has been 3,000 capital loss deduction has been $3,000 for Mary Joint forever. It never got indexed for inflation. And the so those are things. So this is indexed for inflation.
Chris Picciurro, CPA:Now if a business invest more than $4,000,000 in a year, then you start losing that $2,500,000 maximum deduction. So that's called a phase out. Now the vast, vast majority of taxpayers that take section one seventy nine purchase much less than $4,000,000 worth of assets, but there is a dollar for dollar reduction at that $4,000,000 of total assets. So this is this is important, John. Let's say you are a, contractor.
Chris Picciurro, CPA:Let's say you are a roofing company, and you are increasing your fleet of of of trucks on the road. You might want to if you're getting close to a $4,000,000 of of new trucks or new equipment, you might wanna stagger that. You might want not wanna take delivery until the next year because then you could phase out your section one seventy nine deduction. So there's Here's a
John Tripolsky:curveball question for you, actually. And this and this is this is an honest to god scenario that I'm thinking of, and tell me if save it for later. So, obviously, you know, I live in somewhere of a rural area next to a city. There was actually a guy I know who mentioned something about this years ago. So, you know, agriculture equipment.
John Tripolsky:Some of it's extremely expensive. Like, if you think Ferraris are expensive, go try to run a a high yield farm, I guess. And I remember him I don't know what the dollar amount was, but I remember him saying it was, like, drastically high. I mean, I'm guessing probably, like, $8,000,000 or something. So he had some and and tell me if this applies.
John Tripolsky:So say you lease something and then you buy out a lease. Is it still considered the same thing, or would that be a way to maybe stagger it?
Chris Picciurro, CPA:It depends. Depends on the capital lease or operating lease. Some technical leases are considered capital leases for tax purposes. So a lot of those are like our friends that are long haul truckers. They actually lease the trucks, but it's with a five year lease with a dollar buyout.
Chris Picciurro, CPA:That's considered it's legally a lease. However, it's technically, from a tax perspective, a capital lease, and you depreciate it. So it really depends on the facts and circumstances.
John Tripolsky:Okay. No. No. That's a and I I just I thought of that one. I'm like, hey.
John Tripolsky:Maybe that would be a way to stagger some things if it's not, you know, one item if it's multiple. Right. Awesome. Now that that's a great example even better than mine with the truckers. Like, you see most of them that I've ever known have done that.
Chris Picciurro, CPA:Oh, for sure. You've just got you've gotta just plan around things. So what's out so in in now permanently eligible are HVAC systems, roof, security systems, fire alarms, those things are available on on commercial property for section one seventy nine. So any tangible personal properties like off the shelf software, QIP. So that's qualified improvement property for nonresidential real estate.
Chris Picciurro, CPA:So that means, John, this helped out a ton. I'll give you an example. Think about a restaurant. So you got a restaurant that puts leases the property to do a restaurant. It's probably a million, million and a half dollars of kitchen equipment and build out.
Chris Picciurro, CPA:Now that's all eligible. That is one seventy nine eligible property. And it wasn't before? All that deduction year one because maybe they don't need it all. Probably not.
Chris Picciurro, CPA:But maybe they wanna take a portion of it if that makes sense.
John Tripolsky:Interesting. And you're right, man. I've I've knowing people that have owned restaurants, I mean, you too. You basically you rent or lease the vanilla envelope. Right?
Chris Picciurro, CPA:Mhmm.
John Tripolsky:You know? So you are getting a box, and you gotta put everything in it, and that is kitchen equipment. Yeah. There's a reason why they repo that stuff. They just don't let it go if you don't No.
Chris Picciurro, CPA:It's very it's very valuable, which ties into this. It doesn't have to be new equipment. It could be new or used equipment, assuming it's not from a related part party. So if you're starting a restaurant and a restaurant down the street went out of business and they've got you know, these are super expensive, like a fryer hood or something that you could take out of their their box, like you say, the restaurant and put it into yours, or maybe it's it could be anything. You know?
Chris Picciurro, CPA:Then that's always rule for section one seventy nine. However, it has to be used more than 50% for business, and that's where things get sticky when we're talking about vehicles. But we're gonna run through some we're gonna run through some short case studies. So who's so those are the those are the assets that are eligible. That's what we call eligible property.
Chris Picciurro, CPA:Now who's eligible? Pretty much all businesses. S corps, c corps, partnerships, or LLCs, taxes partnerships, and sole proprietors. But here's the situation. The deduction is elected on the entity level, but it passes through to owners when you have a pass through entity like an S Corp or or a multi member LLC.
Chris Picciurro, CPA:So, John, if you and I formed a multi member LLC and let's say we wanted to mine Bitcoin and we bought a $100,000 worth of of computer equipment, we could the LLC would elect the the section one seventy nine, and then we would get that reflected on my k one and your k one. You can't get your k one and say, well, I'm I'm electing section one seventy nine on my half. And so that's that's been one thing. So if you're a business owner and you have an s corp or taxed as a partnership or taxed as a c corp, even though well, let's take c corp out. Even though that deduction ultimately flows on your personal tax return, it's made at the entity level.
Chris Picciurro, CPA:And be very aware because a lot of states don't allow for bonus depreciation but do allow for section one seventy nine. So maybe a California because we like to talk about them a lot. California doesn't allow bonus depreciation, but allows section one seventy nine. So if I've got a client that's in California, a business owner, I might elect out of bonus and elect into seven one one seventy nine. So this is where planning comes into play with your tax professional.
John Tripolsky:And and and when you say planning too, just so so if I heard you right there, just to kinda reiterate it. So you said if we if we were partners in a multi member LLC Right. The decision to elect is made at the entity level. So it you can't elect and me not in theory. Right?
John Tripolsky:Like, it comes down. There's like you said, okay. So that so that decision being made there is final not final, but hopefully hopefully, we talk enough to make the decision together. But Yeah. It doesn't always happen.
Chris Picciurro, CPA:It's made at the entity level, and that's where operating agreements could be important, you know, because we wanna make sure that we know who has the authority to make those tax matter decisions. And maybe you can't use the bonus depreciation or the section 179 and maybe I can because owners apply their limits based on their share of the taxable business income. So again, you might be in three different S Corps. You might be in three different partnerships. So sometimes, you know, you've got you definitely have to do that planning when you're buying fixed assets.
Chris Picciurro, CPA:But one thing to give people some peace of mind. This election, although you plan your fixed asset purchases before the end of the year, the election is made on a timely filed tax return. So we don't have to decide today what our 2025 section one seventy nine deduction is. We can decide when we prepare the tax return in 2026.
John Tripolsky:And I feel like this episode, Chris, and I mean this wholeheartedly, I feel like this may be one of the best ones that we've done, maybe through all of our episodes or if not, you know, in at least the past 20 or thirty, that really gives a very abbreviated, but a behind the scenes view of how tax planning actually works. And not just us saying like, hey. You need to do this. Like, this is a fantastic example. Right?
John Tripolsky:Because even if you're in well, here, let's be honest. Right? And I will I will be very transparent with this. Even though I'm a business owner, I am the worst freaking bookkeeper on the entire planet, not because I don't know how to do it because my mind's somewhere else all the time. So even something that is simple as that, I realized that I cannot be the one doing it.
John Tripolsky:And mine's very simple. But it's like this. Right? Like, if you're in the business, you may put off thinking about something like this for so long. But if you have somebody that you're truly working with for tax planning, they're always thinking about this and helping you guide decisions along the way, not at the end the road.
John Tripolsky:Right?
Chris Picciurro, CPA:Well, that's the importance of bookkeeping. Think about this, and then we're gonna finish up on section one seventy nine. Let's say you try to do your own bookkeeping. You purchase a piece of equipment, your CPA, your tax professional, your enrolled agent has no idea about the equipment, but they could log in to your software, your accounting software, and they pull out your profit and loss statement. And on your profit and loss statement, they see an expense that says, Chrysler Financial, right?
Chris Picciurro, CPA:I think Chrysler Financial exists. All of them have, you know, have a subsidiary. Right? I don't know if that's eligible section one seventy nine property. I don't know if it's a lease payment.
Chris Picciurro, CPA:I don't know if it's a purchase. I don't know how much the cost of the vehicle was. All I see is you put in auto expense Chrysler Financial, which in your mind as a business owner, you're thinking, yeah, that makes sense. Right? That's my payment.
Chris Picciurro, CPA:But from a tax perspective, is it a lease? Is it a purchase? Is there depreciation? Is there personal use percentage? Is it eligible for bonus appreciation?
Chris Picciurro, CPA:Although there's a lot do we have to do your balance sheet? Did you trade in some other vehicle? And now you have a new vehicle. And even though you're self admittingly not a good bookkeeper, without being a bookkeeper and understanding how those things affect your balance sheet and the balance sheet affects your tax return, even if you're self employed, you should have a balance sheet. If your balance sheet's right, your p and l's right.
Chris Picciurro, CPA:That's an old saying here. So that's a great example of something innocent. You didn't do anything wrong by saying Chrysler Financial is auto expense because in a business owner's mind, that's what it is. But when we're trying to do tax projections, the first step is have a good set of books so we know what we're doing to project where we're gonna be at. So
John Tripolsky:And that's another great example you gave there. Honestly, like, it's it's so simple to most. Right? Like, oh, of course, I know what it is. My tax professional, of course, is gonna know what it is.
John Tripolsky:No. They're looking at hundreds, if not thousands of returns every year. How in the world are they gonna know that you went to the dealership on April 27 and traded in a vehicle, which we won't even get into, you know, depreciation recapture. That's one Favorite know why why I'm chuckling is because I I dropped that one about three months ago and impressed this gentleman right here.
Chris Picciurro, CPA:Yes.
John Tripolsky:But you're right. It's it's different vantage points at the same thing. However, they all need to align in one way, shape, or form, or you're missing out. It's not even like you're doing anything negligent. Right?
John Tripolsky:You're just missing out on huge opportunities for savings. Huge. Right?
Chris Picciurro, CPA:Tying into, like, let's say your section one seventy nine deduction. We know it's limited to your taxable business income. So what happens and I've used this strategy on s corp clients many, many times. Let me give you an example. An S Corporation, let's say their typical income is about $200,000 a year.
Chris Picciurro, CPA:Okay? But let's say that once every four or five years, they need to buy a really big piece of equipment. And that piece of equipment is $800,000 I would like to spread that out and wipe out their income for the next four years. Bonus depreciation isn't what I want. I intentionally like section one seventy nine on the entire piece of equipment.
Chris Picciurro, CPA:I can deduct $200,000 in the year it's purchased. The remaining $600,000 of section 179 just gets carried forward on the business tax return. So I know the next three years of $200,000 of profit, I'm going to be wiping it out. So you can use a carry forward to section one seventy nine strategically in in that example. So so it's not, you know, everything is situationally dependent and you but we you have to think about and and for in the client that I'm talking about, they would run that equipment in the ground, and it was there really wasn't a lot of value to it, you know, when it when after four, five years, they beat the heck out of it.
Chris Picciurro, CPA:It was a piece of
John Tripolsky:Well, like, take
Chris Picciurro, CPA:the take
John Tripolsky:it to the scrapyard, get your $600 and
Chris Picciurro, CPA:Yeah. They they scrapped it. They got a few few dollars, and then we could pay the so, so anyway, think about that. So section one seventy nine does carry forward. And then again, if the asset purchases exceed the phaseout limit, meaning the $4,000,000 in 2025, then the deduction is reduced dollar for dollar.
Chris Picciurro, CPA:And so if you have over 6 and a half million dollars worth of purchases in 2025, you will get no section one seventy nine.
John Tripolsky:And when you say dollar for dollar, I know you explained that, but really, could you explain that just really, really briefly before we close this out so you that cap was was it was it 4,000,000? I'm so sorry. $4,000,000. Correct. So 4,000,000.
John Tripolsky:So after that 4,000,000, what what does dollar for dollar actually mean for those that may not know exactly?
Chris Picciurro, CPA:That means that that for every dollar over 4,000,000, a dollar section one seventy nine is phased out. So let's look at an example. Let's say you've got a construction firm. Let's make it easy in their c corporations. We're not worried about k ones.
Chris Picciurro, CPA:Right? They bought 4 and a half million dollars worth of equipment in machinery in 2025. So they bought 4 and a half million dollars. The limit's 4,000,000 for 2025. That means they're $500,000 over the phaseout amount.
Chris Picciurro, CPA:Now typically, they can take 2 and a half million dollars of section one seventy nine deduction. Right? But because they're $500,000 over the the the $4,000,000 phase out, we have to reduce their maximum section one seventy nine deduction by that same $500. So their maximum section one seventy nine is $2,000,000. And the remaining amount is still depreciated, but just not immediately.
John Tripolsky:Perfect. Perfect. No. Thank you. Thank you for explaining that.
John Tripolsky:I thought I had an idea what it was. It was pretty close, but I figured it's good to explain that. But no. This was awesome, man. Honestly, this is probably one of my favorite ones that we've done in a very long time.
Chris Picciurro, CPA:Well, now we're gonna get you Nice. We're gonna get you a a sticker that I'm gonna put on your computer. And when you open it up at next time you're at a coffee shop, you're gonna forget about it, and it's gonna say, ask me about Section 179.
John Tripolsky:I'm gonna have all these people coming up to me like, you don't care. Just push play. I'm gonna send you the QR code. You can listen to this podcast. It'll be fantastic.
John Tripolsky:But and, you know, no stickers on my computer, sir. It's a Mac. You know I, like, wax this thing. I know. You you I say that because Chris, everybody is a is a he's a PC guy, which you guys should be in your industry.
John Tripolsky:You don't wanna get too too Macky. Although I did get you on convinced to an iPhone and an Apple Watch. So we'll leave it at that. Anything else we wanna add to this one before we release everybody back to their normal lives?
Chris Picciurro, CPA:For the thank you for being part of the teaching tax slow community. If you found this valuable, just subscribe, like, share. The content is driven by you, the teaching tax slow community, and the more interaction we get, the better. We don't charge for this podcast. We don't have upsells for this podcast.
Chris Picciurro, CPA:We're very blessed to have sponsors that allow us to do this, but we do it for you, the listeners and watchers.
John Tripolsky:Awesome. Awesome. It's a good way to end it. So, hopefully, everybody, you did enjoy this as well. If you're listening to this, don't forget that you can actually watch me and Chris harass each other back and forth.
John Tripolsky:And then when we have a guest, we tend to harass them a little bit, on YouTube. So check it out on there. God. We have 650 some odd videos on there. Tons of them.
John Tripolsky:Quick tip reels, usually about sixty, seventy seconds, as well as all these podcasts. So check those out. We'll see if we'll be back here again next week on the Teaching Tax Flow podcast. Have a great week.
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