The Enterprise Value Specialists at Ceibass recently were involved in the sale of a lawn & landscape business where the owner of the business was not aware of all of the ramifications of Section 179 of the US tax law.
“Most owners know what Section 179 of the United States Internal Revenue Code is all about…accelerated depreciation,” said Ceibass CEO Tom Fochtman. ”Lots of owners buy equipment in the 4th quarter in late December and then use Section 179 to reduce their tax burden.”
Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. This property is generally limited to tangible, depreciable, personal property which is acquired by purchase for use in the active conduct of a trade or business.
“Bush started it, Obama kept it and Trump has taken it up to $1,000,000 max annually. This is huge,” said Tom. “The issue can be the Section 179 Recapture that is required by the IRS if you sell or dispose of the asset before its useful life is used. Pretend it’s a $1M loader that has a useful life of 5 years. You take 179 and save the $420K in taxes based on a 42% tax bracket. Now you sell it next year or sell your company as an asset sale. The IRS makes you recapture the remaining 4 years… or $336,000 is coming back into your tax return as ordinary income. Many owners are not aware of this.”
Remember: If you are selling your company and it’s an asset sale, any Section 179 recapture comes back to the seller and hurts the deal. If it’s a stock sale it is not a factor.