How Can You Take Advantage of Section 179 Deduction?
Many businesses often think of Section 179 as another complicated Internal Revenue Service (IRS) tax code when, in reality, it is straightforward and cost-saving for qualifying businesses. This section of the IRS code can save your business money on equipment costs and allow you to invest in more equipment and software that boost the efficiency of your business operations.
By taking advantage of the Section 179 tax code, you can improve the production capacity of your business, expand product and service lines, and boost overall sales and revenue.
What is Section 179 Tax Deduction?
Plainly referred to as Section 179, the United States Internal Revenue Code Section 179 (26 USC § 179) allows a business or taxpayer to deduct a part of or write-off the full purchase price of a qualifying asset on their income taxes as an expense. In this case, the term ‘asset’ refers to a specific tangible property used in running a business.
The IRS introduced Section 179 to incentivize small and medium-sized businesses to invest in assets and equipment that streamline their operations and ultimately boost the economy. When your business takes advantage of this tax code, it does not mean you spend less on the equipment. Instead, you get to save money in the year the qualifying equipment was purchased rather than depreciating it over several years.
Section 179 helps your business purchase more equipment and boost its operations without taking money away from the tax revenue.
Which of Your Business Purchases Qualify for Section 179?
The IRS has put caps on how much a business can write off on equipment as well as the types of assets that qualify for tax deductions. Qualifying equipment or asset is tangible and depreciable property that:
- The business needs to use more than 50% in business operations.
- The asset is purchased and put in business use the same year it is acquired, and deductions are claimed.
- Off-the-shelf software. This means that your business can only claim Section 179 deduction on software that is available to the general public and not customized.
These three general requirements are the most important guiding requirements when making a Section 179 claim.
If business property is not used for business purposes 100% of the time it is in use, then the business can only claim for the percentage that is used for the time as long as this percentage is more than 50%. For instance, if your company purchases a computer for business use, and it is used for business purposes only 75% of the time, you can only deduct 75% of the total cost of the computer.
Most tangible business equipment qualifies for Section 179 deductions. These include computer hardware, software, and various business infrastructure improvements.
How to Take Advantage of Section 179 Tax Deduction
It is easy to take advantage of the section 179 tax deduction. The first step is to ensure that the equipment you wish to purchase or have purchased qualifies for the deduction. Note that the business must purchase the equipment and not lease it; leased equipment does not qualify.
The business must also not have acquired the equipment from a related party. This means that you must not have purchased the business asset from your siblings, parents, spouse, or descendants or businesses they own or run. The list also includes their trusts and charitable organizations.
Once you have purchased the qualifying equipment or software, you must begin using it before claiming a tax deduction. For instance, if you purchase equipment in December of 2021 but do not use it until 2022, you cannot claim a deduction in your 2022 tax returns; you would have to make the deduction claim in 2023.
There are several extra steps you must take to be able to make a Section 179 claim. Most importantly, you must keep meticulous records of the dates of purchase and the associated costs of the equipment. You will also be required to complete the IRS Form 4562 and include it in your filing when you file tax returns.
Limitations of Section 179 Tax Deduction
There are a number of limitations to the Section 179 Deduction you must bear in mind.
First off, the deductions limit for 2021 equipment purchases is $1,050,000. This amount is the maximum amount your company can claim on your taxable income for qualifying equipment purchased in 2021.
The upper cap full deduction your business can claim on qualifying equipment is $2,620,000. This means that if you purchased business equipment that costs more than $2,620,000, you cannot claim a full price deduction.
For equipment costing higher than this limit, Section 179 will decrease the rate dollar-for-dollar until the cost of the equipment reaches $3,670,000.
How Section 179 Tax Deductions Can Benefit Your Business
Does your business rely on old clunky computers that are a bottleneck to business processes? Perhaps you use outdated software that drains your employees and makes it difficult to streamline operations?
Understandably, the cost of computers and software for a business in a competitive market can be prohibitively high today. Section 179 allows you to upgrade your equipment – especially computers, computer accessories, and software – and write off their costs next year.
In the past, your company would spend money on business assets and equipment and spend over five or more years writing off their costs. This is because the rate of write-off is about $10,000 for every $50,000. Section 179 offers your business an incredible opportunity to upgrade your systems now and claim a full-price write-off the following year.
The Next Step: Act Now
Investing in the right equipment – including computer software and hardware – means getting your hands on the right tools that will boost your business’ efficiency, employee productivity, and eventually sales and profits.
If you consider upgrading or replacing your business’ technology systems, Section 179 tax deductions will significantly reduce entry barriers. Visit Intelice.com or call (301) 664-6800 to talk to an expert and learn how you can take advantage of Section 179 tax deductions to upgrade or replace your business’ IT equipment and services while saving costs.