Understanding Section 179 and Building Improvements
The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. However, when it comes to building improvements, the eligibility for Section 179 is more nuanced.
What Property Qualifies for Section 179?
Generally, most tangible personal property used in business qualifies for the Section 179 deduction. This includes:
• Machinery and equipment
• Computers and software
• Office furniture
• Vehicles (with certain restrictions)
Building Improvements: A Gray Area
While real property, including land and buildings, typically does not qualify for Section 179, certain building improvements may be eligible. The Tax Cuts and Jobs Act (TCJA) expanded the definition of qualified property to include some improvements to non-residential real property, such as:
• Roofs
• Heating, ventilation, and air conditioning systems
• Fire protection and alarm systems
• Security systems
Qualified Improvement Property (QIP)
Qualified Improvement Property (QIP) is now eligible for Section 179 expensing. QIP includes improvements made to the interior portion of a non-residential building after the building was placed in service. However, it’s important to note that QIP does not include:
• Enlargement of the building
• Elevators or escalators
• Internal structural framework of the building
Limitations and Considerations
While some building improvements may qualify for Section 179, there are important limitations to keep in mind:
• The maximum deduction is $1 million (as of 2024)
• The deduction begins to phase out when total asset purchases exceed $2.5 million
• Not all states conform to federal Section 179 rules
• The property must be used more than 50% for business purposes
Alternatives for Non-Qualifying Improvements
For building improvements that don’t qualify for Section 179, businesses may still have options:
• Bonus depreciation: This allows for immediate expensing of certain property
• Regular depreciation: Spread the cost of improvements over their useful life
• Repair regulations: Some improvements may be classified as repairs and expensed immediately
It’s crucial to consult with a tax professional to determine the best strategy for your specific situation and to ensure compliance with IRS regulations.