Make the Most of Your Section 179 Deduction
Business owners wanting to maximize their tax deductions can benefit from looking into the recent changes to the
Section 179 Deduction. Although this part of the IRS tax code has been in play since 1958, what’s included and allowed under that code has changed over time.
The most recent changes in the code have affected what’s allowed as a business write-off, and these changes can provide tremendous benefits for small and medium-sized businesses that take advantage of it.
The Tax Cuts and Jobs Act was signed into law on Dec. 22, 2017, it introduced broad changes to taxes for both individuals and businesses. It had a positive effect for Section 179, increasing both deduction limits and the cap on equipment purchases.
It also increased write-offs for qualifying property, allowing the deduction of certain improvements to existing non-residential property. This included such improvements as roofs, heating, air conditioning and ventilation systems, fire protection, alarm systems and security systems.
The write-offs for business equipment is particularly attractive to small business owners, who can receive immediate benefits by purchasing the equipment they need right now.
Small Businesses Get a Big Boost
Until the most recent revisions to Section 179, equipment that was purchased by a company was written off incrementally each year as “depreciation.” For example, let’s say a company purchased a machine for $50,000. For the next five years, they could write off $10,000 every year as depreciation, and eventually would recoup the expense of the purchase.
Even though any type of write-off is appreciated at tax time, being able to write off only a portion of the equipment each year had a significant effect on business budgets. Large investments into equipment would need to be spread out over time, since the purchase of each piece of equipment would tie up funds.
However, with the revisions to Section 179, business owners can now write off the entire purchase price of equipment in the year they buy it – as long as the equipment qualifies under the tax code.
Higher Limits, Better Deductions
In addition to allowing the entire price of equipment to be deducted in a single tax year, the IRS now has increased the annual limit on how much can be written off. For most small businesses, the entire cost of qualifying equipment up to $1,000,000 can now be written off. (This doubles the amount allowed as a deduction prior to 2018.)
The change applies to all businesses that buy, finance or lease either new or used business equipment. For the 2018 tax year, it applies to equipment bought or leased and put into service between Jan. 1, 2018 and midnight on Dec. 31, 2018. Equipment purchased and put into service between Jan. 1, 2019 and Dec. 31, 2019 must be applied to the 2019 tax year. (Key words to pay attention to are “put into service.” That means equipment can’t just be purchased and left in a store room; it must be put to use to qualify.)
One other limit for businesses to be aware of is the total amount of purchased equipment that is allowed. Section 179 has a total purchase limit of $2.5 million, and after that amount is spent, the deduction decreases on a dollar-by-dollar basis. Once a business reaches a total equipment purchase amount of $3,500,000,
the deduction disappears entirely.
These limits provide businesses with a better way to budget their equipment purchases over a few years and plan ahead to maximize the deduction benefits. It also allows them to buy equipment when they need it, since the entire amount can be written off in the same year, therefore recouping the cost almost immediately.
Getting the Bonus Depreciation Deduction
Some years, Section 179 offers a Bonus Depreciation Deduction. For 2019, that deduction will be available at 100%. One of the big changes created by the 2017 tax cuts is that this deduction now covers used equipment, which previously was disqualified. Now, the government says it only has to be “new to you” for a business to enjoy that deduction. That means
refurbished or used equipment now can be included as a deduction.
Even businesses showing a net loss are qualified to deduct some of the cost of equipment and can carry forward the loss.
Nearly all types of business equipment are deductible in the revised Section 179. That includes
computers, office furniture, machines and business vehicles.
Section 179 and Software
The IRS reports that
software is increasingly popular as a Section 179 purchase. However, it’s important to know exactly which types of software qualify and what will not be considered deductible. Section 179 stipulates that it must be “off the shelf,” which means it has to be software that can be purchased by the general public and is not custom designed. It cannot have been modified for the business’ individual use and it must have a non-exclusive license.
As part of Section 179 requirements, any software that will be deducted must also meet the following criteria:
- It has to be purchased with a qualifying lease or loan
- It must be used in the business for income-producing activity
- The software is required to have a determinable useful life
- It must be expected to last more than one year
According to the government, Section 179 does not include databases as deductible computer software, although there are a few exceptions. That would include the database being in the public domain or being critical to the operation of other software that qualifies for the deduction. In order to qualify for the Section 179 deduction, purchases must be used for business purposes more than 50% of the time. That applies to all types of purchases, including vehicles, office furniture, computer equipment and software.
At Aventis Systems, we work with your business to provide a full range of hardware, software and IT solutions. Call us at 1-855-AVENTIS to discuss how we can be of service to you.