So, you’re looking to expand your business, perhaps by purchasing new equipment, but you’re not sure if now is the right time to buy. Well, in terms of making a capital investment for your company, now is a better time than ever thanks to a recently affirmed small business tax break.
This tax break, known as the Section 179 deduction, allows you to deduct the full purchase price of qualifying (I will delve into this later) equipment and/or software from your taxes during the year in which it was purchased or financed.
What is the Section 179 Deduction?
The basics of the Section 179 deduction are:
- You can deduct purchases of up to $500,000 from taxes during the year in which you buy the equipment for your business
- You can apply bonus depreciation of 50% on the remaining amount
- Qualifying equipment includes tangible personal property used in business, equipment purchased for business use, computers, office furniture/equipment, vehicles in excess of 6,000 pounds, and computer “off-the-shelf” software
This is a big deal because it allows for upfront savings and frees up money for future investments. It lowers the taxable profits of the business for the given year, and sometimes this amount can be significant.
Though many companies use this deduction to lower their tax burden for major equipment purchases, small and often equally necessary expenditures – emphasis on this, as it can be a laptop or new office chairs – can be written off under the Section 179. Although some businesses didn’t know the details of this deduction, for many it is a welcome reprieve that it is now written into law and something that can be used year after year.
First, I’ll explain exactly what the deduction is, and then I’ll explain how your business can utilize the Section 179 to save money!
Tax Savings for Small Businesses
The Section 179 deduction was created as a response to the economic downturn of 2008, as it incentivizes businesses to invest in new equipment and it provides some much-needed tax shelter for smaller companies.
The Section 179 deduction was recently tucked into a massive, trillion-dollar spending bill that was passed by Congress at the start of 2016, according to The New York Times. Though this was originally a temporary measure as part of 2010 legislation, it is now a permanent tax break for small businesses. Further, the $500,000 amount will be adjusted for inflation in $10,000 increments in coming years.
As part of the same legislation, known as the “Protecting Americans from Tax Hikes Act of 2015,” 50% bonus depreciation on purchases will be extended through 2019, providing your business with even more savings. This depreciation is taken on top of
Depreciation is a way of allocating the cost of business assets over the “life” of said items. Bonus depreciation is a way to accelerate depreciation, which allows you to deduct some of the cost of an asset in the year in which it was purchased.
So, how does it help your business? Let’s explore the fine print and tell you how it will help you save money on the equipment that you need to drive your business ahead!
What the Section 179 Deduction Means for Your Business
When you buy equipment, the ideal tax implications are that you would be able to write off the full price in the year that you make the purchase. Instead, you are often forced to depreciate slowly the total purchase price over a number of years. By being able to write off the amount in the year of the purchase, you’re able to realize tax savings that wouldn’t normally be available in standard depreciation.
Let’s look at an example of a fictional transaction so that we can understand fully the potential savings that can be accrued by using the 179 deduction.
If you’re still unsure as to how to break down your purchases and potential tax savings, try using the Section 179 calculator.
Now, you may be asking yourself “what qualifies for a Section 179?” The answer is most of what you would think – business-use vehicles (these have to be more than 6,000 pounds – you can’t simply write off your Honda Accord because you use it for commuting) and tangible goods including “off-the-shelf” software. There is a business-use requirement that was written into the law to protect against fraudulent activity. This says that the equipment and vehicles must be used more than 50% of the time for business purposes. If you use equipment for business purposes 80% of the time, then 80% of the cost is eligible for the Section 179 deduction.
Bob Adams is a serial entrepreneur and founder of BusinessTown.com.