Your Guide to Section 179 Deductions

Your Guide to Section 179 Deductions

Business owners always look for the best ways to save money. Taxes significantly impact a company’s bottom line, which means it pays to use every possible deduction. That’s where Section 179 enters the picture. If your business purchased or leased equipment during the year, taking advantage of Section 179 can significantly reduce your company’s tax liability.

Does Your Business Qualify for Section 179?

The Section 179 guidelines have changed, so it’s important to discuss whether your company meets the criteria laid out in current regulations. Essentially, Section 179 allows business owners to deduct the full cost of equipment or certain other expenses from the company’s gross income now rather than having to spread the deduction out over several years. 

While the depreciation deduction so commonly used in the past was a benefit, the majority of business owners would have preferred to deduct the entire purchase or lease cost immediately rather than waiting. The tax advantages can be enormous and, in many instances, make it possible for a company to invest even more money in making the business profitable. 

Is using Section 179 a panacea for every company’s needs? The short answer is no, but having the option is certainly important. Before making any significant financial decisions, it’s always a good idea to review the various options with an accounting expert. The important thing to remember is that many purchases companies make every year do qualify for Section 179, and the savings generated are certainly worth taking advantage of. 

What Purchases Qualify?

Section 179 has limitations. For 2020, the maximum amount a company can write off is capped at $1,040,000. The vast majority of small business owners can purchase new, or even used, equipment up to that amount without encountering any issues. Expenses over that cap are subject to limitations, so discuss your plans with a financial advisor if your purchases will exceed the $1,040,000 cap.

The law is especially important for businesses purchasing machine tools. In the past, major machine tool investments could only be deducted over a period of years, with the exact term determined by the type of investment and the total cost. That was rarely ideal for machine shop owners, especially those just starting out or expanding an existing operation.

Today, if your tax situation suggests taking the entire deduction in one year would be advantageous, doing so only requires filing an additional form with your return. Again, reviewing the advantages of using Section 179 should be reviewed with your financial advisor or tax accountant. 

In addition, Section 179 allows the deduction of software. With so much equipment now being controlled using some form of computerization, specialized software is routinely required to take advantage of new machines. Milling machines are good examples. To achieve the closest tolerances, modern milling machines use sophisticated software during their operation. That software is generally expensive, which means being able to write if off the first year may help to keep the overall finances in balance.

Only Tangible Property Qualifies

It’s not uncommon for businesses to purchase intangible assets. However, intangibles like patents and copyrights cannot be deducted using Section179. Only tangible property is deductible under Section 179. As always, if you’re unsure how to approach the purchase of intangible property, review the options with a tax expert first. 

The Equipment Doesn’t Have to Be New

One interesting part of Section 179 is that equipment purchased doesn’t have to be new. It only has to be new to you. Given the current state of the economy, it’s possible that high-quality equipment may become available in the very near future. If your company is expanding, that means taking advantage of nearly new equipment that’s available at bargain prices is certainly worth considering.

While there may be moving costs associated with purchasing used equipment, a low price for that milling machine, planer, lathe, or shaper may make the extra expense and any associated inconvenience worth the investment. Business owners rarely regret taking advantage of such opportunities.

On the other hand, with the economy taking a hit from the coronavirus pandemic, even new equipment may be available at rock-bottom prices. Since it’s unlikely the pandemic will last indefinitely, it pays to explore new and innovative ways to make your organization more competitive when the markets regain their momentum.

Taking Advantage of New Technology 

Even if your shop has existing equipment that’s still useable, it’s worth looking at ways to become more convenient. Many businesses still rely on older equipment that’s relatively labor intensive. Modern machinery often makes it possible to do more with fewer employees. That’s another way to increase profits.

Obtaining new equipment now makes it possible for business owners to reduce waste. During machining, a great deal of scrap is created. Older machines are also prone to inaccuracies, which means completed projects may not meet strict tolerances required by customers. Taking advantage of Section 179 makes it possible to acquire new (or newer) equipment like sophisticated CNC machines that reduce both labor and waste expenses. 

Company Vehicles May Still Qualify

In the past, some organizations took advantage of Section 179 regulations that allowed the deduction of luxury vehicle expenses in one year. Obtaining high-end luxury vehicles was never the intent of the regulations, and some vehicles no longer qualify for the deduction. 

However, vehicles weighing over 6,000 pounds can still be deducted using Section 179. That means most company trucks and service vehicles may still qualify. If you’re unsure if an anticipated vehicle purchase will fall under the current guidelines, contact an accounting or tax expert who’s familiar with the regulations for advice before making a purchase. 

Don’t Ignore the 50 Percent Business Use Clause

One issue that’s created problems for business owners seeking to use the Section 179 deduction is what’s commonly referred to as the “more than 50 percent business use” requirement. Any vehicle that’s used for private purposes more than 50 percent of the time is not eligible for the deduction. 

That 50 percent rule isn’t generally meaningful when it comes to machinery, as most machines are used solely for the business, but there are occasional problems with software use. If you purchase software and use that software for purposes unrelated to the business, it may not be deductible under Section 179.

Comparing Section 179 and Bonus Depreciation

Section 179 was designed to allow smaller businesses to enjoy some of the same types of tax breaks large corporations have access to. That’s why the current caps are in place. Bonus depreciation, on the other hand, is more often used by larger companies because those caps are not a factor. That doesn’t mean smaller businesses can’t take advantage of bonus depreciation.

If your company spends more the current cap allowed for Section 179, you may be able to take advantage of bonus depreciation. Using Section 179 also requires a company to be profitable. If your company is showing a new loss, your accounting team may recommend using the bonus depreciation option rather than Section 179. 

In some instances, companies may qualify to use both Section 179 and the bonus depreciation option. Because the tax laws are complex, it’s always important to work with a Section 179 expert when planning equipment purchases.

Some Building Improvements Also Qualify

While a building or land purchase doesn’t qualify for Section 179, many improvements to a building do. That means, for example, if your machine shop needs air conditioning, that cost should qualify for Section 179. Alarms and fire suppression equipment are also deductible using Section 179. 

If you’re unsure if a building improvement will qualify for Section 179, take the time before making any commitment to determine how that improvement will affect your taxes.

Who You Purchase Equipment From Matters

There are other regulations related to Section 179 that business owners must be aware of. A business cannot use Section 179 if the equipment was purchased from direct relatives, including spouses, siblings, parents, and grandparents. In addition, equipment to be deducted under Section 179 cannot be obtained from businesses, trusts, or charitable organizations the purchaser has a relationship with.

Get Started Now

If you’re planning to purchase new or used equipment in the coming months, take the time now to review your plans with a tax expert first. The timing of your purchase may impact your tax picture significantly. 

Also, you must start using the equipment to make use of Section 179. In other words, if you purchase the equipment this year but don’t use it until after January 1, 2021, you’ll have to wait a year to take advantage of the deduction. 

Claiming the deduction isn’t difficult. If you’re handling the company’s taxes yourself, simply claim the deduction on Part 1 of Form 4562. However, it’s rarely a good idea to risk making mistakes with your company’s tax documents.

Rather than risking making any mistakes on your company’s taxes, consider having them completed by a tax professional who’s familiar with the advantages Section 179 provides. Remember, since Section 179 applies to most machines used in modern shops, company vehicles, and software, it pays to take advantage of the tax savings the option provides.

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