Navigating the complex world of business taxes can be challenging, especially when dealing with substantial investments such as commercial roofing. The Internal Revenue Service (IRS) has tax codes specifically designed to help businesses manage the costs associated with such investments. One of the most notable is Section 179.
The Basics of Section 179
Section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. This includes certain improvements to non-residential property, such as roofs. Understanding how this deduction works can help you make better financial decisions for your business.
However, it's important to note that Section 179 comes with limitations. As of 2023, businesses can only deduct up to $1,050,000 on $2,620,000 worth of equipment purchases. Beyond this investment threshold, the Section 179 deduction begins to phase out on a dollar-for-dollar basis and is eliminated entirely for businesses that invest $3,670,000 or more in a single year.
Application to Commercial Roofs
Prior to the Tax Cuts and Jobs Act of 2017, commercial roofs were not eligible for Section 179 deductions. However, the Act expanded the definition of qualified real property eligible for Section 179 to include improvements to non-residential roofs. These include replacing, repairing, or improving existing roofs.
Now, let's consider a real-life example to demonstrate how Section 179 works for a commercial roof. Suppose your company decides to replace the old, leaking roof on your commercial building. The replacement costs $900,000, a significant investment.
Accumulated Depreciation and Adjusted Cost Basis
| Item |
Value |
| Building Cost |
4,500,000 |
| Accumulated Depreciation on Building 12/31/2022 |
1,038,462 |
| Roof Replacement |
900,000 |
| Producer Price Index Adjustment for Date of Disposition |
86.55% |
| Adjusted Cost of Original Roof Being Disposed |
778,955 |
| Adjusted Accumulated Depreciation as of 12/31/2022 of Roof Being Disposed |
-179,759 |
| Current Depreciation on Asset Being Disposed |
-9,987 |
| Loss of Disposal of Roof |
589,210 |
| Section 179 Expense on New Roof |
900,000 |
| Total Deduction for New Roof |
1,489,210 |
Under regular IRS rules, the cost of the roof would be depreciated over 39 years, the standard recovery period for commercial real estate. Therefore, each year, you would deduct $23,077 from your taxable income as depreciation expense (($900,000 / 39 years) = $23,077).
However, thanks to Section 179, instead of slowly depreciating the cost of the roof, your company can deduct the entire $900,000 expense in the year the roof was installed and put into service. This drastically lowers your business taxable income for that year, potentially saving you in taxes, assuming your company has enough income to offset the deduction.
The adjusted cost basis of the roof would be zero after taking the Section 179 deduction, as you've claimed the entire cost of the roof in the first year.
Implications and Limitations
While the Section 179 deduction can be highly beneficial, businesses must be mindful of its limitations. Firstly, the deduction cannot exceed the taxable income of the business. In other words, if your company only earned $400,000 in the year the roof was installed, you would only be able to claim $400,000 of the total $900,000 cost, carrying over the remaining $500,000 to the next tax year.
Furthermore, it's essential to remember that taking the full Section 179 deduction in the first year means you cannot claim any further depreciation on the roof in subsequent years. If your business finds itself in a higher tax bracket in future years, you may have been better off depreciating the roof over its useful life to offset the higher taxable income.
Lastly, like all tax strategies, it's essential to consult with a tax professional before making any decisions. Every business situation is unique, and tax laws can change. Therefore, personalized advice is always the best course of action.
Conclusion
The Section 179 deduction can be a potent tool for businesses making significant investments in equipment or improvements, including commercial roofs. However, understanding how it works and the potential implications and limitations is critical to maximizing its benefits. As always, working with a tax professional can help you navigate these complexities and make the best decisions for your business's financial future.
” With our GoTech Proprietary Customer Service-Oriented Roofing Process you can skip the headaches, schedule delays, lack of contractor communication, cost increases, and nonsense – we handle every roofing project detail from start to finish in a digitally written scheduled process you will receive on day one ”
Julian Stevens
Trust GoTech Roofing in Northern Virginia and Washington DC
Founded by Julian Stevens over a decade ago, GoTech Roofing has established itself as the number 1 provider of roofing services in Northern Virginia and Washington DC. We provide roof repair and roof replacement services with a real focus on customer satisfaction. We are a Class A Contractor and fully insured with Workman's Compensation and Liability Insurance. GoTech Roofing provides each and every client with an incomparable roofing experience through our outstanding customer service and exceptional quality. We understand that each roof is unique and will treat it as such. Having worked 10 years providing multi-million dollar contracting services for the Federal Government, Julian took a look at the antiquated roofing construction process and knew there was a better way. He built GoTech Roofing utilizing Dynamics Customer Relationship Management (CRM) software fully integrated with Microsoft Project Professional software to create a Proprietary Customer Service-Oriented Roofing Process that starts with your first communication with us all the way to when we shake hands when the job is done. With our GoTech Proprietary Customer Service-Oriented Roofing Process you can skip the headaches, schedule delays, lack of contractor communication, cost increases, and nonsense – we handle every roofing project detail from start to finish in a written scheduled process you will receive on day one.