If your business is like many, you’ll likely want to invest in upgraded technology. However, there is often limited room in the budget for these investments. Section 179 is designed to resolve this issue, allowing businesses to take out major deductions from their taxes. Read on to find out more about Section 179 and how it can benefit your business.
What Is Section 179?
Section 179 is a tax deduction for businesses allowing them to deduct the cost of purchasing certain equipment, software, and more. It’s specially designed to help small businesses, though it can aid midsize and large businesses as well. It started as an addition to the Small Business Tax Revision Act of 1958 and had a maximum deduction of $2000-4000 (depending on if the tax return was filed jointly or not). Since then, revisions and additions have expanded Section 179 to be an even greater help to businesses.
How Can Section 179 Benefit Businesses?
Section 179 mainly benefits businesses by encouraging them to purchase new equipment and software. This can greatly reduce taxable income and allow businesses to make much-needed upgrades to their qualifying assets. This is especially the case with technology. Outdated technology can pose major security risks. In addition, it can frustrate employees who have to deal with long loading times and malfunctions. Having extra room in the budget to purchase updated technology and software will help keep your company’s data secure, and your employees more satisfied.
What Assets Qualify For Section 179?
Many assets qualify for the Section 179 deduction, including:
- Business vehicles that weigh over 6,000 lbs
- Certain types of software (see the next section for more information)
- Office furniture
- Computers, tablets, and other technology
- Equipment that is used for business purposes
- Some building improvements (only for non-residential buildings)
If the above assets are only used partially for business use, they can still be deducted. You’ll just need to deduct the percentage that is used for business purposes. For example, a $1000 laptop that is used 75% for business and 25% for personal use you can deduct $750 on. The percentage it’s used for business purposes must exceed 50%. In addition, you can deduct the above assets regardless of how they are acquired. Whether you buy it, lease it, finance it, it’s covered under Section 179. A final note to consider with qualifying assets is that used equipment counts as well as new equipment.
What Software Qualifies For Section 179?
Software has a few limitations so as not to create loopholes that could cause businesses to take advantage of Section 179 in unintended ways. In general, the software will need to meet the following qualifications:
- It must be purchased outright or paid for using a lease or loan
- It must be used in the business for an industry-related purpose to make income
- It must have a specific lifespan that exceeds one year
There are also certain disqualifications:
- It cannot have exclusive licensing or be unavailable to the general public (no custom software)
- It cannot be modified heavily
- It cannot be a website or a database
If the software in question meets these requirements, it can be included in Section 179.
What Assets Don’t Qualify For Section 179?
There are a few assets that don’t qualify for Section 179. One of these is anything that is considered “real property.” Real property includes permanent buildings as well as aspects of permanent buildings, such as pavement. The only exception is the building improvements covered under Section 179, which can include HVAC system installation, for example.
In addition, the assets can’t be gifts or inherited. The only assets that qualify must be specifically purchased, as Section 179 is primarily designed to promote business investments. These also must be purchased from a party that isn’t related to the business in any way. For example, you can’t deduct a computer the sales department bought from the marketing team in a single business– in other words, the business can’t purchase equipment from itself.
Also, all assets must be used in the United States, and only office furniture applies, not furniture used for other purposes. In short, furniture used for living quarters does not qualify for the Section 179 deduction.
How Much Can Be Deducted?
Over the years, the maximum deductible amount from Section 179 has become quite generous. As of 2021, the deduction can be up to $1,050,000, not including bonus depreciation. Keep in mind that this amount can decrease depending on how much equipment is purchased. If the amount exceeds $2,620,000, the amount will be reduced on a dollar-for-dollar basis. This is why Section 179 is said to especially benefit small businesses, though midsize and larger businesses can still take advantage of it regardless thanks to bonus depreciation.
The bonus depreciation is currently set at 100%. Businesses can take out bonus depreciation after Section 179, and it allows businesses to spend more than the limit and still get tax benefits. To take out the Section 179 deduction, you’ll need to fill out the corresponding part of Form 4562. This appears at the top of the form, Part I.
Should Businesses Get Professional IT Help For Section 179 Investments?
Consulting an IT professional is highly recommended for technology-related investments for Section 179. This is especially the case because of the end-of-year December 31st, 2021 deadline, which requires equipment to not only be purchased but put into use by that time. Adding new technology and software can quickly become complicated to manage. Upgrading old technology comes with its own challenges and pitfalls, such as ensuring all the data is wiped and troubleshooting any issues that arise. This could cause you to miss the deadline and waste valuable time and resources.
As such, consulting and utilizing the services of IT professionals will mitigate these risks. It will allow you to invest in much-needed improvements to your business without unnecessary hassle. If you’d like to start investing in technology and get tax benefits from Section 179 as a result, our team at Orion Networks would love to help. For more information, contact us today.
