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Strategic Deductions: How the Section 179 Tax Code Saves Business Dollars
Cutting overhead costs is critical to remaining strategic in a fast-moving, highly competitive business environment. However, no business wants to make cuts to critical business resources. More and more, business owners are looking for the small and strategic ways to reduce cost without having a negative impact on overall operations in the name of pinching pennies.
Luckily, tax breaks for businesses offer the perfect opportunity to cut costs without sacrificing any elements of core business strategy. However, most business owners would agree, these tax breaks are often few and far between. However, Section 179 is a nationwide, annual tax code that every American business owner should be aware of and take advantage of.
Breaking Down the Tax Code: Why was Section 179 Created?
Section 179 is an IRS tax code specifically designed to help business owners cut overhead costs. Specifically, the code allows for increased savings for business owners come tax season. Section 179 allows business owners to deduct the full amount of business equipment purchases within a calendar year.
The IRS Section 179 deduction was enacted to help small businesses take a depreciation deduction for certain assets in one year, rather than depreciating them over a longer period of time (typically over a 5 to 6 years).
Why You Should Care: Understanding the Strategic Benefits of Section 179 for Business Owners
The benefits of Section 179 for SMBs are twofold. First, and most obviously, the tax break allows business owners to save valuable dollars at tax time. This positively affects your bottom line. It allows business owners to make an outright deduction, equal to the full purchase price of a qualifying piece of equipment. This helps businesses reduce taxable income, and ultimately alleviate business tax burdens.
Second, it offers a great incentive for business owners to finance or invest in a wide variety of business equipment and resources. With the ability to deduct the full purchase price, businesses are able to more strategically implement company equipment and resources to address needs.
Defining Business Equipment: What Equipment Qualifies and What Doesn’t under Section 179
Before business owners hop on the Section 179 bandwagon, it’s critical to have a baseline knowledge of what’s deductible and what’s not. The last thing any business owner wants is to make a huge investment only to find out it’s not deductible under Section 179.
Let’s look at what business equipment is deductible and what’s not covered:
- Networking Equipment / Switches
- Phone Systems
- Routers & Firewalls
- Wireless Internet
- Storage Devices
- Battery Backups
- Non-customized, off-the-shelf software
- Real Estate
- Permanent Structures / Buildings
- International Property
- Gifted or inherited equipment
- Used equipment
Basically, qualified equipment is any tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business. However, because business owners acquire equipment in a variety of ways, it’s important to note the specific coverage for different types of equipment purchase.
Here’s the kind of purchases that are covered:
- Qualified equipment purchased using cash, debit or credit.
- Qualified equipment acquired through $1 buy out leases.
And here’s the kind that isn’t covered:
Fair Market Value (FMV) leases aren’t deductible, generally due to shorter terms and lower monthly payments than a Capital Lease or bank loan. For business owners, FMV lease payments are 100% tax deductible as an operating expense but not a capital expense since the equipment is not seen as a purchase. Also, important to note that equipment rental agreements don’t qualify either as ownership doesn’t rest with the business.
Tax Code Limitations: Understanding Section 179 Parameters for Deduction
In addition to qualification considerations, there are some other Section 179 mandates that business owners should know. Check out some of the key limitations of Section 179 below:
- A deduction cap of $500,000
- A 50% bonus deduction after $500,000 is reached
- Deductions can’t reduce the taxable income below $0.
Also, equipment must be purchased and put into service in the year in which deduction claims are made. Putting equipment into service means it must be set up, working, and in use. Buying equipment and then letting it sit around to gather dust doesn’t count.
Doing the Math: How Section 179 Saves Taxable Income for Business Owners
Here’s how the traditional Modified Accelerated Cost Recovery System (MACRS) works:
- Say a business with a gross income of $100,000, buys out a $1 phone system valued at $20,000.
- The MACRS method of depreciation only allows you to deduct 20% in the first year ($100,000 x 20% = $20,000 in depreciation).
- This reduces a company’s taxable income to $80,000.
However, under the Section 179 Depreciation:
- Say a business has a gross income of $100,000, and you buy out a $1 phone system valued at $100,000.
- The Section 179 Deduction depreciation method allows businesses to depreciate the full amount in one year ($100,000).
- This reduces a company’s taxable income to $0.
Not Just About Savings: How Section 179 Can Also Help Businesses Optimize Operations
Imagine a business employs 20 people who are currently working on an old, slow server. If management invests in a new server under Section 179, it translates to huge time savings for all employees, boosting productivity and morale. In fact, a new server can save an average of 15 minutes of business time per employee, per day. That translates to 1300 saved business hours every year.
Now, let’s imagine that impact across different industries:
- If a physician saves 15 minutes per day they can see 130 more patients per year at 30 minutes per visit.
- If an attorney saves 15 minutes per day, they can do an additional annual billing at $300 per hour which equals $20,000.
- If a real estate broker or sales agent saves 15 minutes per day, they can make more appointments, more calls, and more commission.
That amounts to big changes. Depending on the equipment purchases your company has made this year or has planned, there are huge benefits to be taken advantage of in Section 179. Getting to know the code is the first step. Also, it’s important to remember that for 2017 Section 179 deductions, equipment must be purchased and in place by midnight on December 31st, 2017.
That leaves LESS THAN TWO MONTHS to take advantage of equipment deductions in the upcoming tax season. If you have questions about Section 179 or want guidance on choosing and implementing new equipment, reach out to a local technology firm for a consultation. Tech experts can ensure you make the most of your equipment and software investments.