After fluctuating several times over the last few years, Section 179 of the IRS tax code was permanently increased in 2015 to provide a $500,000 deduction on qualifying equipment purchased and put into use during the tax year 2016.
This accelerated depreciation deduction was originally implemented in 2008 as part of the broader stimulus package, which provided much-needed tax relief for small businesses while encouraging them to invest in their future. Typically, depreciation deductions are spread out over time, but Section 179 allows business owners to accelerate that advantage by writing off the entire cost of a purchase the year that they buy it.
In theory, Section 179 is actually quite straightforward. Nearly everything from computers to off-the-shelf software to certain business vehicles to office furniture qualifies. The total amount that can be written off is equal to the amount that a business spends on qualified purchases — spend $500,000 and you can deduct $500,000. But if you only spend $10,000, you can only deduct $10,000.
But like all things associated with the US tax code, there are multiple layers of gray involved with Section 179. If the total cost of equipment purchased exceeds $2,000,000, the deduction is reduced dollar for dollar (and completely eliminated above $2,500,000). In addition, a business must show sufficient profit to take advantage of Section 179. Only have $100,000 in profit? The maximum you can deduct is then only $100,000.
The legislation that permanently increased Section 179 to $500,000 (the “Protecting Americans from Tax Hikes Act of 2015”, or PATH Act), also solidifies a bonus depreciation through 2019. Businesses of all sizes will be able to depreciate 50% of the cost of equipment acquired and put in service during 2015, 2016, and 2017, with the bonus depreciation phased down to 40% in 2018 and 30% in 2019.
Another major Section 179 perk allows business owners to acquire up to $500,000 worth of equipment without actually spending that amount this year. With a properly structured capital lease, the amount you can deduct may actually exceed what you have to pay up front. Tread lightly, though, as many small-business leasing firms are notorious for applying outrageous terms to loans. CMIT Solutions can help you navigate this tricky landscape by leveraging the trusted relationship we maintain with our leasing partner, Marlin Equipment Finance.
Since equipment must be purchased and put into use in the same tax year as its depreciation is deducted, there are only a couple of weeks left to take advantage of Section 179’s $500,000 deduction in 2016. If your business is considering a critical hardware or software upgrade, now is the time to take action — with the guidance of a professional tax advisor, of course*.
If, after consulting with your professional tax advisor, you make Section 179-eligible purchases, actually taking the deduction on your 2016 taxes is relatively easy. You or your tax preparer must fill out IRS Form 4562, the deduction must be taken on an item-by-item basis, and complete records of your business equipment purchasing or leasing must be maintained.
The good news is, even if you aren’t ready to make a purchase now for the 2016 tax year, Section 179’s $500,000 deduction is permanent until further legislative notice. Once you’ve consulted with a professional tax advisor about the benefits Section 179 could bring to your business, call or email CMIT Solutions to map out the hardware and software purchases that are right for you. Who doesn’t want to reduce their tax burden AND upgrade their technology at the same time?
And if you’re reading this while thinking it’s too late to take advantage of Section 179, sign up for our weekly QuickTips now so you are always in the know. Our team of managed IT experts are constantly on the lookout for ways to save our clients money.
*Information dispensed in this QuickTip is for illustrative purposes only and accuracy is not guaranteed. CMIT Solutions and its owners, affiliates, and partners are not tax advisors, and no communications are intended to offer any tax advice. Please consult with qualified tax professionals concerning your situation.